What is a Reverse Mortgage?
A reverse mortgage is the latest tool to help
plan and fund retirement.It is a way of making the most of the
value of your property. Typically, one would enter into an agreement
with one of the few reverse mortgage lenders to turn your equity
into readily available finance, without the need to move home.
Reverse mortgages are, simplistically, agreements
with the provider that they will place a charge (similar to a
mortgage) on your home, in exchange for offering you a cash lump
sum which doesn't have to be paid back until you pass on or move
into care.
Typically, you would have to be aged 62 or more
and own your own home to be eligible for a reverse mortgage. Usually,
the home must be your main residence (6 months of the year or
more).
There are no repayments to be made during
your lifetime and the interest rolls up over the years to provide
the reverse mortgage lender with a return on their long term investment.
Why is it called a reverse mortgage?
The plan is called a reverse mortgage because,
instead of costing you money, the home is paying you. Usually,
a mortgage is the homeowner's biggest expenditure and lots of
payments are put 'forward' towards depleting the mortgage and
building your equity stake in your home.
Instead of you paying the bank, the bank is paying
you.
One simplistic example:
You take out a reverse mortgage on a property
in the amount of $200,000. The term of the reverse mortgage is
a 10 year period. The bank will pay you $1666 a month for that
120 month period.
This money can help you fund the basic needs of
retirement. Dependant on other forms of finance, it may also be
used to supplement your income to pay for life's finer things
so that you can enjoy your retirement the way you deserve to.
What Factors Determine The Terms?
The terms of a reverse mortgage are different
for each individual. Which is why at Responsible Reverse Mortgage
we aim to offer you a personal service to make sure you get the
terms that are right for you.
Factors that help determine the term include
the following:
- How old you are - In the case of a couple this is decided
by the youngest person.
- How much your home is worth
- The type of plan you choose - there are private reverse
mortgages available in addition to the government sponsored
HECM reverse mortgages.
- The method through which you choose to receive your money
- Currently, there are five payment plans:
- Tenure (Also Known as a 'Reverse Annuity Mortgage')
- Term plan
- Line of Credit
- Modified Tenure
- Modified Term
Click here
to read more about the different types of reverse mortgage payment
plans
Can I choose how to receive my money?
If you take out a reverse mortgage, one of the
major advantages is that you can choose how you would like to
receive the money that you release from your home.
Some clients like to know that they will be receiving
a fixed income for a set term whilst others will like to take
a more proactive stance in managing their money and want a lump
sum. Others might know that they are likely to need a certain
amount over a period of time, but are not so sure exactly when
they need it.
Fortunately, with a reverse mortgage, there are
payment plans to suit everyone.
The Tenure Plan:
Here the borrower receives equal and regular monthly
payments from the reverse mortgage lenders for as long as they
live and remain in the property.
The Term Plan:
Here, similar to the Tenure plan, the borrower
will receive equal and regular monthly payments from the reverse
mortgage provider with the exception that the payments are made
for a certain length of time, or term. The term of the plan is
decided by the borrower and agreed by the lender. What's important
to remember is that repayment isn't necessarily due when the term
is over. Repayment is due when the borrower dies or ceases to
live in the property anymore.
Line of Credit Plan:
The line of credit is without doubt the most popular
reverse mortgage plan. Here, instead of a monthly payment, the
borrower decides as and when they need the money, instructing
the reverse mortgage lender to issue an installment. Payments
are unscheduled and it works in a 'line of credit' where there
is a pre-determined maximum claim amount which the borrower can
dip into when they want.
Modified Tenure Plan:
The modified tenure plan is a 'combination' plan.
Like the tenure plan, the borrower will receive regular monthly
payments for the rest of their life or residency. On top of this,
the borrower can request money as and when they need it, up to
their line of credit.
Modified Term Plan:
Another 'combination' plan, the modified term
plan combines the Line of Credit Plan with the Term Plan. Here
the borrower will receive regular monthly payments for a fixed
term (decided by the borrower) but retains the ability to draw
more money from the lender, up to their line of credit, as and
when they want.
Can I change the reverse mortgage rates?
The short and simple answer is YES.
Many people who have taken out a reverse mortgage
decide that their needs have changed and it is time for them to
change their payment plan. Perhaps a major unexpected expense
has come up and they would benefit from a lump sum as well as
their regular payments.
Whatever the reason you want to change your reverse
mortgage rates or terms of your , you can refinance
at a small cost.
The Pros and Cons of Reverse Mortgages
PROS
- If you take out a government sponsored reverse mortgage,
you will never be forced to leave your home
- You will never leave any debt to your heirs. If the unlikely
should happen and there is a difference in the value of your
home and the size of the debt, the Housing Department will
cover the difference.
- The money you receive from a reverse mortgage is tax-free.
It is your home, your money and you will have already paid
tax on it.
- You can earn interest on funds left untouched in your line
of credit, assuming you opt for a government regulated plan.
- You have already built equity in your home and so the qualification
standards for senior reverse mortgages are far less rigorous
than conventional mortgage and finance products.
CONS
- Reverse Mortgages may affect your entitlement to state benefits.
- Some of the costs involved in setting up a reverse mortgage,
whilst relatively insignificant compared to the amount of
tax-free money you receive, do require a financial commitment
from you.
- You won't be able to access your entire equity stake in
your property.
- You will need to pay for mortgage insurance to protect the
investment that your reverse mortgage lender has made.
What can I do with the money?
Many people find themselves in a house-rich, cash-poor
situation where most of their earnings have understandably gone
into their home and not a savings plan over the years. A reverse
mortgage can effectively turn your home into a savings plan, allowing
you to access the capital tied up.
The recent economic events have taken their toll on retirement
and savings funds, leaving retirees with little options when it
comes to retirement finance. A reverse mortgage may be a good
way to make up the shortfall some people experience when they
retire.
You may use the money to purchase a new car to get around, go
on that holiday that you have dreamed of, or even help pay the
bills. Either way, the benefits of an extra source of income during
retirement are obvious to see.
Many seniors are turning to reverse mortgages to help their families
out in these times of recession and hardship. Others are converting
homes to accomodate family m
embers who may be struggling or out of work.
Either way, you can use the money exactly as you see
fit.
