What Is A Reverse Mortgage?

Reverse Mortgage, Home Income Plan, or Equity Release Schemes

First published: ADawnJournal.com May 24, 2010

Home equity release schemes are becoming more and more popular Canada, Australia, the U.K., the U.S., and other countries as a way of boosting retirement incomes for those people who are finding it difficult to live comfortably on their govt. pension and have a significant amount of their wealth tied up in real estate property. They are referred to by a number of names colloquially, of which one is the “reverse mortgage”. This title has come about because just as a mortgage sees you paying money bit by bit towards the end goal of owning a house, an equity release scheme allows you to withdraw from a pot of money that you have paid into, with the end result being that you own none of your house, and will gain nothing from its sale.

One of the most popular ways to conduct a home equity release is to sell your home to financial institution who will then lease it back to you. You benefit from an immediate cash lump sum, which you can add to the govt. pension and any other pension you receive in order to pay the rent. If you have paid in a significant enough amount to your mortgage you will be able to use some of the cash lump sum to pay off the remainder of what you owe to the bank. If you are mortgage-free, you will have the entirety of what the financial institution paid you to do with as you see fit. It is important to find a reputable institution with whom to carry this out, however, as institutions have been known to default on their own mortgages, leaving their tenants in a situation of real difficulty.

There is some controversy over the morality of offering an equity release scheme, as many people consider that the deal is “mis-sold” by the institutions who offer it. Quite often, the amount that is paid for the house is less than two-thirds of its actual value, and that much less than the individual would be liable to receive if they were to sell it on the open market. What they gain from this is the opportunity to stay in their own home, but as mentioned above, the institutions offering equity release are not always wholly reputable.

If the sum total of all of this is to make equity release schemes look like some sort of scam, then that is not the intention. It is merely to say that when looking into home equity release systems it is generally beneficial to do a bit of background work, finding out from past customers how reliable, efficient and trustworthy the institutions you have spoken to are. If you get a deal from a reputable institution the equity released will allow you to use a more pro-active method of wealth creation which will potentially leave a lot more money for you to bequeath in your will should you wish to, or to enjoy retirement in style otherwise. It is worth speaking to an independent financial advisor to get more specific information to your case.