Asset rich and cash poor is a phrase regularly used by financial advisors. A reverse mortgage involves a financial institution offering a lump sum and/or a monthly payment in return for a share of the properties equity. Equity release schemes have become increasingly popular in recent years as they provide a useful monthly sum of money for those who are on a fixed retirement income.
Advantages of a Reverse Mortgage
- Retirement income. A reverse equity mortgage provides an invaluable increase to a person’s income, especially for those who don’t have a large pension or savings.
- No need to move house. The senior is able to continue to live at the home for the remainder of their life. This will be the case whether that person lives to 65 or 120 years of age.
- Flexibility. It is possible to select the percentage of equity used to generate a retirement income. This means that it remains possible to leave some money to close family and friends.
- No monthly payments. Unlike a Home Equity Line of Credit or other loan/second mortgage, no repayments will need to be made. This helps to maximise the level of disposable income.
- No credit scoring. It doesn’t matter if someone has a poor credit history. Provided someone owns their home outright, their application is likely to be approved.
Disadvantages of a Reverse Mortgage
- Ineligibility for state benefits. An equity release scheme could mean that the individual loses their entitlement to certain benefits, such as pension credits (UK) or Medicaid (U.S.). Social security and Medicare won’t be affected at all.
- Loss of inheritance. Interest and charges accrue quickly so those who decide that a reverse mortgage loan isn’t right for them will find that they have already lost a sizable chunk of their homes’ value. This would also be an issue if the homeowner decided that they wished to move house.
- Property maintenance. The fact that a homeowner retains title to the property means that they are also responsible for its maintenance, taxes and insurance.
- Not tax deductible. Any interest that accrues on a reverse equity mortgage doesn’t become tax deductible until the mortgage/loan is fully cleared.
A reverse mortgage can provide a welcome boost to those who are on a fixed retirement income, but it is important to have a full appreciation of what this means. A reverse equity mortgage could affect the beneficiaries’ entitlement to a variety of state benefits and will also reduce the size of that person’s estate. It is important to seek professional guidance before signing up for an equity release scheme.