Reverse Mortgages vs Release of Equity

How do you get a loan when you are retired?

When assessing home loan applications there are two main factors that banks look at:

  • Whether there is enough equity in the property being used to secure the loan.
  • Whether the borrower will be able to service the loan.

So how do you secure a loan then when you are retired and are no longer earning an income?

There are two main options available to retirees who own their own home. One is to use the equity in their home to secure what is known as a reverse mortgage and the other is sell a part of the equity in their home to a lender.

With both options there is no interest or principal payable until the borrower either dies or elects to sell the home or payout the loan.

With a reverse mortgage, compounding interest is calculated from the date of the advance until repayment. Ultimately, what will be repayable will depend on the interest rate and when the loan is eventually repaid.

With an equity release arrangement, the borrower agrees to sell a percentage of their property for an amount calculated by the lender, based on the current value of the property less an allowance for your right to remain in the home. Under an equity release arrangement, the borrower may be given a rebate if the loan is repaid within a certain period but otherwise the most the borrower can ever be expected to repay is the agreed percentage of the sale price.

Which is the better option, depends on multiple factors such as the interest rate of the reverse mortgage, the age of the borrower and how much the value of the property could be expected to appreciate during the life of the loan.

If you are considering borrowing pursuant to a reverse mortgage or equity release arrangement, then you should get independent advice from a financial advisor or legal professional. The lender will usually require you to get independent legal advice before signing the loan documents. If you are securing a loan by selling equity in your property, then you will need to engage legal representation to prepare the sale documentation and arrange the settlement.

Whether you are borrowing pursuant to a reverse mortgage or equity release arrangement, our property lawyers can help guide you through the process from beginning to end.

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