Reverse mortgages and their limitations

What is a reverse mortgage?

A reverse mortgage allows seniors and retirees to use the equity in their home to take out a loan which is then paid back, with interest, when the homeowner sells, downsizes or dies. Interest rates however tend to be high and that interest compounds from day one, which increases the loan amount if there are no regular repayments.

How do you pay back a reverse mortgage?

Unlike a standard home loan, the reverse mortgage is paid off when the home is eventually sold. What’s more, the interest owed compounds, which means that without regular repayments, any outstanding interest owing is added to the total amount of the loan.

For example, in just seven years, a $100,000 reverse mortgage at 6% per annum and no repayments can become a debt of $150,000, and takes just 12 years to double.

So not only do you own less of your home, with the lender now owning a proportion of it, you have less control over your single most valuable asset.