What is a reverse mortgage on BTL property and how does it work?
As mortgage brokers, we get a lot of questions from clients about reverse mortgages. Often called equity release, this is a relatively new financing product that has started to take off in the UK market, especially amongst seniors and people close to retirement age wanting to leverage the equity in their property. In 2020 alone, almost 73,000 homeowners aged 55 and over across the UK used reverse mortgages and similar products to release £3.89bn of equity from their homes. However, there’s a lot of confusion and misunderstanding around this product, so we’ve created this guide to give you a clear idea of what a reverse mortgage is, how they work, and much more, so that you’re able to make an informed decision.
What is a reverse mortgage?
This is a type of lifetime mortgage or releases equity mortgage. It gets this name because it allows interest to grow over and above the original capital that is borrowed with no specific date for full repayment to be completed. This is unlike a standard mortgage, which will have a set term and each monthly payment will reduce the capital amount you borrowed, and the interest applied to it.
Unlike a standard mortgage where the aim is to buy a property and pay it off in order to own it within a set period of years, a reverse mortgage aims to give you the ability to raise money based on the equity you already hold in your property. The full sum is paid off through the estate upon the death of the applicant or if you signed a joint application, the death of the last applicant.
If your home is worth £250,000 and you have fully paid it off, you could access around £200,000 or more of that equity (keeping in mind that some equity will be used to repay the interest on the loan). Similarly, if your home is worth £250,000 and you have £50,000 remaining on your mortgage, you will be able to get a reverse mortgage based on the £200,000 stake you own in your property and the interest applied to your reverse mortgage, say, around £170,000 or more.
To get a clearer idea of exactly how much you can raise using a reverse mortgage, we recommend that you use a reverse mortgage calculator or, for more in-depth advice, speak to a broker who specialises in reverse mortgages.
Can I use a reverse mortgage to purchase an investment property?
One of the most appealing factors in getting a reverse mortgage is that you can use it for anything. You can buy an investment property, supplement your retirement income, make essential changes to adapt your current property, pay for specialist medical care, or even travel.
When using it to purchase an investment property it is called a buy to let reverse mortgage. How much you can borrow will primarily depend on how much equity you have in your primary residence, the loan to value (LTV) ratio used by lenders. As a result, it depends very much on your personal financial circumstances, as each loan is tailored to each applicant and lender.
Who can apply for a reverse mortgage?
In the UK, anyone aged 55 or older can apply for a reverse mortgage, although some lenders have a higher entry-level of 60 or 65. There are some additional conditions you will have to meet:
- You must own your residence outright or have equity in your residence
- It cannot be a commercial property
- You must be a resident of the UK that resides within the country for 6 months or more each year
- For joint reverse mortgages, the younger applicant must be at least 55 years old
Advantages and disadvantages of BTL reverse mortgage's
Like any loan product, there are pros and cons to reverse mortgages that are worth looking into before you sign up.
- You can raise funds by releasing the value you hold in your property
- The funds you receive from your reverse mortgage are tax-free
- These funds can be used for anything, including supplementing retirement income, renovating your home, or buying an investment property (a BTL reverse mortgage)
- There are no monthly repayments you must meet, and you don’t pay the principal loan amount or even interest payments during your lifetime
- You will not owe more than the loan balance or the value of the property (whichever is less) if you sell the property
- No assets you own other than the home you take out the reverse mortgage against can be used to repay a reverse mortgage
- It is essential to go through a reputable broker, as reverse mortgage scams are getting more common
- You may reduce the value of what your heirs will receive from your estate
- Some reverse mortgages have very high fees and interest rates
- The interest rate you are offered depends on the lender, your personal circumstances, loan amount, and the value of your property
- Your loan is limited by the equity in your home and its value
- You may lose eligibility for means-tested benefits, including income support, universal credit, council tax support, and pension credit
Because you are using one of your largest and most important assets as leverage to raise funds, it’s important to get reverse mortgage advice and loan recommendations from a reputable, ethical, and experienced provider. Our brokers can explore all your options, guide you through the fine print, and find a product that works well for you.
Are there age limits for reverse mortgage applications?
Other than the restriction that applicants must be 55 years or older, some lenders set a reverse mortgage age limit at 85 or 95. In some cases, no upper age limit applies. This means that the mortgage remains open during the applicant’s lifetime or, in some cases, if you go into long-term care. Here, a mortgage broker is a great resource to use, as they can assess your case and find a competitive lender with the right reverse mortgage age limit who best matches your requirements.
Reverse mortgages vs. equity mortgages
These are two different property-based financial loan types:
- Reverse mortgage – The lender pays you in a lump or a monthly sum, relying on the sale of your home after your death to recover the capital paid out to you and the interest on the loan. In simple terms, the lender is buying portions of the equity in your home each month. Any remaining equity goes into your estate and is paid out to your heirs. This type of loan is only available to people aged 55 and older.
- Equity mortgages – Here, the loan is granted based on the equity you have in your property. It is a lump-sum payment that you then pay back to cover the capital amount and interest. Essentially, it converts the equity in your home into a cash loan. This type of loan is available to anyone who meets the eligibility criteria, regardless of age.
Can commercial properties be eligible for reverse mortgages?
No. Currently, only your primary residence qualifies for a reverse mortgage.
How are reverse mortgages repaid?
Reverse mortgages are repaid upon death, either through the sale of your home or by your heirs paying off the balance of the loan itself.
What costs apply to a reverse mortgage?
This depends on your lender and the terms of the mortgage they are offering but are usually similar to the costs of a typical mortgage product. Typically, reverse mortgages involve the following costs:
- Broker fees (if applicable)
- Legal fees
- Opening and closing fees
- Interest fees
- Home valuation fees
In terms of interest fees, this will depend on whether you want to receive monthly repayments, a lump sum payment, or access payments according to your needs. Typically, lenders offer a fixed interest rate, but some offer variable rates too. It’s best to talk to your broker as they can give you a clearer idea of how each option affects the repayment of your reverse mortgage.
Why is the loan to value (LTV) important?
When looking for a reverse mortgage, it’s important to consider the LTV of different lenders. LTV is a ratio that lenders use to assess the risk associated with each applicant. The higher the LTV ratio, the more risk the lender feels they are taking, which can impact terms and interest rates. The lower the LTV, the lower your interest rates, the more you can borrow, and the more generous your terms will be.
Because you ultimately do not have to pay back the loan during your lifetime but it may affect your heirs, the best course to take when considering a loan is to find a lender with a low LTV assessment for your case.
How to apply for a reverse mortgage
The best way to apply for a reverse mortgage or BTL reverse mortgage is to enquire with an established, reputable broker. At Mortgages for Business, we’ve worked in the industry for over 20 years, with our brokers and team earning a reputation for honesty, transparency, and great client service. We are independent, have a great relationship with our network of lenders, offer bespoke services and advice, and are fully accredited to assist you. We’re not here to sell you on a reverse mortgage – we’re here to help you find a financial product that works for you.
13th September 2021