A reverse mortgage, also known as a lifetime mortgage in the UK, is a financial solution designed for homeowners aged 55 and over who wish to unlock equity from their property without selling it. 

BankingTimes explores how reverse mortgages work, what the borrowing limits are, and which types are available. 

Whether you are considering this option to supplement your retirement income or fund home improvements, understanding both the advantages and disadvantages will help you make an informed decision. 

Read on to discover everything you need to know about reverse mortgages.

What Is a Reverse Mortgage?

A reverse mortgage, also known as a lifetime mortgage in the UK, is a financial product that allows homeowners aged 55 and above to access some of their home equity without having to sell up or move out. 

With a reverse mortgage, you can access a portion of your home's value as a lump sum, ad hoc drawdowns, or a combination of both. 

Unlike with traditional mortgages, you will not have to make monthly repayments; instead, the loan and accrued interest are typically repaid when you pass away or move into long-term care, at which point your home is sold to cover the debt. 

Reverse mortgages are regulated by the Financial Conduct Authority (FCA) and are popular among retirees looking to supplement their income while remaining in their homes.

How Much Can You Borrow With a Reverse Mortgage?

The amount you can borrow with a reverse mortgage depends on several factors, including the value of your property, your age, and the provider's specific criteria. 

Generally, the older you are, the more you can borrow, as lenders calculate that they will likely recover their funds sooner. 

Typically, you can borrow between 20% and 60% of your home's value, and properties with higher market values may allow for larger loans.¹ 

Consult a financial advisor to assess how much you can release.

How Is a Reverse Mortgage Repaid, and Can You Exit Early?

A reverse mortgage is typically repaid when the homeowner dies or moves into long-term care, at which point the property is sold, and the proceeds are used to settle the loan and interest. 

It is possible to exit a reverse mortgage early, but this often incurs significant early repayment fees. 

The good news

All new lifetime mortgages approved by the Equity Release Council (ERC) offer partial repayment options without penalties, allowing you to reduce the loan balance over time.² 

What Types of Reverse Mortgages Are There?

There are several types of reverse mortgages available in the UK, the most common being the standard lifetime mortgage. 

There are a number of variations on the lifetime mortgage. 

Options include:

• Lump sum mortgages, which do allow borrowers to receive a relatively large amount of money in one go.
• Drawdown lifetime mortgages, which allow homeowners to release equity in smaller amounts as needed, reducing the amount of interest accrued over time.
• Enhanced lifetime mortgages, which are designed for those with specific health conditions, allowing them to borrow more based on a shorter life expectancy. 

Each type of reverse mortgage has its own set of benefits, and you will be required to receive professional advice before choosing the right one for your needs.

What Are the Advantages of a Reverse Mortgage?

Reverse mortgages offer several benefits, particularly for older homeowners looking to access the value of their property without having to sell or downsize. 

A summary of the benefits:

• One key advantage is that you can stay in your home while still accessing funds, which can be used to supplement retirement income, pay for care, or fund home improvements. 
• Additionally, there are no monthly repayments to worry about, as the loan is typically repaid when the property is sold after death or moving into care. 
• Another benefit is that all reverse mortgages (lifetime mortgages) approved by the ERC come with a No Negative Equity guarantee, ensuring that you or your heirs will never owe more than the value of your home.

What Are the Disadvantages of a Reverse Mortgage?

While reverse mortgages can provide financial flexibility, they also come with significant drawbacks. 

A summary of the risks and drawbacks: 

• The most notable is that interest compounds over time, meaning the amount owed can grow substantially, reducing the inheritance left to your beneficiaries. The longer the loan remains outstanding, the larger the final repayment will be. 
• Additionally, early repayment fees can be costly if you wish to exit the loan before the end of its term. 
• Another potential disadvantage is that the money you release from your property may affect your eligibility for means-tested benefits. 

It is essential to understand the long-term financial implications before committing to a reverse mortgage.

Frequently Asked Questions About Reverse Mortgages