What Is a Reverse Mortgage and How Does It Work in the UK?

In the UK, a reverse mortgage generally refers to a mortgage product that allows older homeowners to access money from the value of their property, most commonly through equity release.

In practice, the closest UK equivalent to a reverse mortgage is a lifetime mortgage.

These types of mortgage products are designed specifically for later-life homeowners who are looking to access money from the value of their property. This can be for a range of reasons, from supplementing retirement income, covering large one-off payments or even funding a property purchase.

In this article, we explain what a reverse mortgage is, how they work in the UK, and the key factors to consider before deciding whether this type of borrowing could be suitable for you. Let’s begin.

Is a Reverse Mortgage the Same as Equity Release?

It can be easy to get lost in the world of mortgage jargon, especially when terms are so closely related or used together. So let’s break down exactly what a reverse mortgage is and what equity release actually means:

• Equity release: This refers to the broader UK category of later-life products that allow homeowners to access money from the value of their property while continuing to live there.
• Reverse mortgage: This is primarily an American term for a loan-based arrangement where you borrow against the value of your home while retaining ownership of the property.

In the UK, this type of later-life borrowing will generally fall under the umbrella of equity release, which typically includes two options:

• Lifetime mortgages: you borrow against the value of your home.
• Home reversion plans: you sell some or all of the property to a provider.

This distinction is important to make early on because the two UK equity release options work very differently, even though both may appear when researching ways to access property wealth later in life.

How Does a Reverse Mortgage Work in the UK?

The easiest way to understand the basic concept of how a reverse mortgage works is with a simple example:

Let’s suppose that your home is worth £400,000 and you are eligible to release 40% of its value:

• Property value: £400,000
• Percentage released: 40%
• Amount borrowed: £160,000
• Equity remaining: £240,000

In our example, you would be able to access £160,000 from the property while continuing to live in your home.

The £240,000 remaining in the property therefore represents your equity at the point the money is released. Your equity can increase or decrease afterwards depending on how the property value changes, how much interest is added and whether you make any repayments.

The exact structure of a reverse mortgage will depend on the type of product you choose. For example, you may choose to receive the money as a single lump sum, use drawdown equity release to take smaller amounts over time or use a combination of both.

You would then need to decide on how the interest is dealt with. Depending on the reverse mortgage product you choose, you may be able to:

• Pay the interest as it is charged, helping to prevent the balance from increasing.
• Make partial repayments towards the interest or mortgage balance.
• Make no regular payments and allow the interest to be added to the loan.

If you already have a mortgage secured against the property, this would normally need to be repaid when the reverse mortgage completes, either from the money released or using other available funds.

If you choose not to make any payments, the interest is added to the outstanding balance and future interest is charged on the higher amount. This is known as compound interest and can result in the outstanding mortgage amount growing considerably over time.

While this may sound concerning at first, allowing the interest to roll up can give some homeowners the flexibility to access money from their property without committing to regular repayments from their retirement income.

The trade-off is that more or all of the property’s value may eventually be needed to repay the mortgage, leaving less equity for either you or your beneficiaries.

The Key Points to Know

• You can continue living in your home while the borrowing is secured against the property.
• You may be able to take the money as a lump sum or in smaller withdrawals.
• Interest may be paid, partially repaid or allowed to build up, depending on the arrangement.
• The outstanding mortgage is typically repaid when the property is sold, usually after you die or move permanently into long-term care.
• Products that meet Equity Release Council standards include a no negative equity guarantee, meaning you or your estate will not owe more than the property is worth when it is sold.

How Do I Qualify For a Reverse Mortgage?

As with any mortgage product, the exact criteria can vary between lenders, with each provider applying its own eligibility requirements and, where relevant, affordability checks.

With that said, most lenders will look at a similar set of factors, and these will usually include your age, the property and any existing borrowing you have secured against it.

Age

Most lifetime mortgage products set a minimum age. For equity release products in the UK, these will usually have a minimum age criteria of 55.

However, there are some lenders who may offer certain payment-term lifetime mortgages from the age of 50, provided of course that you meet the lender’s affordability criteria.

For joint applications looking to secure a reverse mortgage, the age of the youngest applicant will usually be used when assessing whether you meet the minimum age requirement.

This is because the mortgage plan is designed to continue for as long as either applicant remains living in the property.

Property

Your home will usually need to be your main residence and meet the lender’s individual equity release property requirements, which could include a minimum property value, construction type and location.

In addition, lenders may also consider:

• Property type
• Lease length for leasehold properties
• Overall condition

Property requirements and minimum thresholds can all vary between lenders and products. And so, it is worth checking with your mortgage broker to see which options may be suitable for your property to help save time in the long run.

Existing Mortgage

It is important to note that you do not necessarily need to own your home outright to qualify for a reverse mortgage.

In fact, one of the more overlooked uses of equity release is that it can actually be used to help fund a property purchase. For example, a lifetime mortgage could be used alongside other available funds to buy a new home.

However, if you already have a mortgage secured against your current property, this would typically need to be repaid either before or when the new mortgage arrangement completes. This could be through the money that will be released, or other available funds.

In practice, this process is sometimes described as remortgaging into equity release, as your existing mortgage is effectively replaced by the new lifetime mortgage.

Personal Circumstances

Eligibility for a reverse mortgage is not based on age and property value alone. Your mortgage adviser will also need to consider whether the arrangement is suitable for your individual circumstances.

In accordance with FCA rules, advisers must ensure that the risks and long-term implications of an equity release product are clearly explained before you proceed.

Furthermore, all UK equity release applicants are legally required to receive Independent Legal Advice (ILA) from a separate solicitor before completion to ensure full understanding of the contract.

This will include a review of your finances, future plans and ensuring that you understand the wider impact on your family if you are planning to leave money or property to friends or family.

As we touched on earlier, products that meet the Equity Release Council standards include safeguards such as a no negative equity guarantee, but it is still important to understand the wider risks and protections of equity release before going ahead.

How Much Equity Do You Need to Release Money From Your Home?

The amount of equity you can release will depend largely on the percentage of your property’s value that the lender is willing to offer. This is otherwise known as the loan-to-value (LTV) ratio.

To see how LTV works in practice, here is a simple example based on a £400,000 property:

These figures are illustrative only but show both the LTV and remaining equity at the point the mortgage is taken out.

With a standard lifetime mortgage, the maximum LTV available will generally increase as you get older. This is because the mortgage is expected to remain outstanding for a shorter period, meaning there would be less time for interest to build up.

Crucially, if you allow interest to build up, the outstanding mortgage balance will increase over time. This can reduce the amount of equity remaining in the property. Changes in the property’s value can also increase or reduce the amount of equity you have left.

What If You Already Have a Mortgage?

If you already have a mortgage or other secured borrowing against your property, this will usually need to be repaid first.

As a general rule, equity release products will typically need to be the only debt secured against the property once they complete.

For example, let’s say that you were eligible to borrow £140,000 but still owed £100,000 on your existing mortgage:

• Maximum borrowing: £140,000
• Existing mortgage repaid: £100,000
• Potential amount remaining: £40,000

In this scenario, £100,000 of the money released would normally be used to clear the existing mortgage, leaving around £40,000 available to you before any applicable fees.

What Are the Pros and Cons of a Reverse Mortgage?

There can be clear benefits to accessing money from your property later in life, but whether a reverse mortgage is a suitable option for your situation will wholly depend on your finances, future plans and what you want to achieve.

Like most things in life, the advantages will naturally come with a corresponding trade-off. Let’s take a look at the key benefits and what you need to consider at a glance:

Advantages of a Reverse Mortgage

The benefits of a reverse mortgage are largely centred around being able to unlock and access wealth that is tied up in your property, without the need to move home or commit to the same repayment structure as a standard mortgage.

• Remain in your home: You can access property wealth without having to sell and move.
• No regular repayments may be required: Depending on the product, you may be able to allow interest to roll up instead of making monthly payments.
• Flexible access to money: Some products allow you to take a lump sum, draw down smaller amounts over time or use a combination of both.
• Choice over repayments: Certain products allow voluntary payments towards the interest or mortgage balance.
• No negative equity guarantee: Products meeting Equity Release Council standards include a no negative equity guarantee.

For some homeowners, these advantages offer flexibility that can be useful in retirement when monthly income may be lower than during their working years.

Disadvantages of a Reverse Mortgage

On the other hand, the main disadvantages of a reverse mortgage will generally relate to the cost of borrowing over a long period, the effect this can have on the equity remaining in your home and the potential reduction in inheritance if you are planning to leave money or property to others.

• Compound interest: If interest is allowed to roll up, the outstanding mortgage balance can grow significantly over time.
• Less equity remaining: A growing balance can leave less of the property’s value available to you or your beneficiaries.
• Possible impact on inheritance: As the mortgage balance increases, more of the property’s value may be needed to repay it, leaving less to pass on to friends or family. Releasing equity can also have wider inheritance tax implications depending on how the money is used and the value of the estate.
• Potential effect on benefits: Money released and retained as savings could affect entitlement to certain means-tested benefits.
• Early repayment charges: Some products may charge you for repaying the mortgage early.
• Fewer options later: Using a large amount of property equity now could reduce the choices available to you in the future.

Ultimately, the pros and cons need to be considered together. The flexibility of accessing money now may be valuable, but it must be weighed against the cost of the borrowing and how much property equity you want to preserve for the future.

What Happens to a Reverse Mortgage After Death?

It’s important to note that with a joint reverse mortgage, repayment will usually only be required when the last borrower dies or moves into long-term care.

Once the mortgage becomes repayable, the executor of the estate will usually arrange for the outstanding balance to be cleared. This is commonly done by selling the property, although beneficiaries may be able to repay the mortgage using other funds if they want to keep the home.

What happens to equity release after death will depend on factors such as whether there is a surviving borrower, how the outstanding balance is repaid and what happens to the property.

There can also be wider considerations when dealing with a mortgage after death, particularly around the estate, joint ownership and what happens to the property next.

How Can a Mortgage Broker Help Me Make an Informed Decision?

At Boon Brokers, our expert advisers can compare suitable products from lenders across the market, assessing the rates, fees, lending criteria and repayment options available to you.

As a member of the Equity Release Council, we follow the regulated standards and safeguards when advising on equity release products.
We ensure that you have a dedicated mortgage adviser as your single point of contact throughout the process. They’ll explain your options, answer your questions and manage your application from start to finish.

Our mortgage advice is completely fee-free, meaning you won’t pay a broker fee for our advice or for arranging your mortgage.

If you’re considering a reverse mortgage or want to understand your later-life borrowing options, contact Boon Brokers to speak with one of our fee-free mortgage advisers.