5
DEC 2017
The Basic Concept of Reverse Mortgages
A very popular means to leverage finance in North America, Reverse Mortgag-
es (RM’s) are often targeted to retirees to allow them to tap into the equity value
of their homes. It is essentially a home equity loan that allows homeowners to
convert the equity of their homes into cash, whilst still retaining the right to
live in the property. Instead of paying it back each month like a typical home
loan, the bank or investment company pays the property “owner”.
For people with low pensions, it allows for one to receive supplementary income
and meet living expenses or even do things they are financially unable to afford
at such points in their lives. The Reverse Mortgage requires the repayment of the
loan after one has ceased occupation of the house, upon sale of the property, mi-
gration or death of the homeowner. At this point the full amount becomes paya-
ble and repaid from the sale of the property. Some are written such that beneficiaries of the property can repay the loan from their per-
sonal resources.
Fairly written RM’s allow for the amount due on the Reverse Mortgage to be the lower of the outstanding loan balance or the market
value of the property. Provisions for receipt of monies on taking on such agreements can be in lump sum, a monthly payment or a line
of credit based on a principal limit. The amount and terms of receipt are carefully
calculated based on the equity value of the home, the owner’s age and current in-
terest rates.
Whilst RM’s can mean money in your pocket to help fund your retirement one
needs to be careful in paying attention to the various fees including origination
fees, service fees, mortgage insurance premium and closing costs. If one has no
heirs it could make sense but in some cases upon death the home will in theory
have to be sold to repay the mortgage and may not be able to be passed on to one’s
estate.