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Can you buy a house with a reverse mortgage?

Can you buy a house with a reverse mortgage?

Unlike a typical home loan, a reverse mortgage is often taken out by people who already own a home. In essence, it allows equity in the home to be unlocked and used on other expenses. Therefore, buying a home with a reverse mortgage is not technically possible. 

Given you are only allowed to borrow a relatively small proportion of your home’s value, it may be difficult to buy a new home for a family member using money from a reverse mortgage. While borrowing to invest is sometimes possible, it comes with the warning that your home could be put at risk. Instead, reverse mortgages are generally designed for costs like medical expenses and renovations. 

What is a reverse mortgage?

A reverse mortgage is a type of loan usually used by people aged over 60that allows them to access funds without needing to sell their home. The borrower does not need to have an income to qualify for a reverse mortgage. The amount that can be borrowed depends on the value of the property and the borrower’s age. The money is repaid when the home is sold. 

Although borrowers are charged interest on reverse mortgages, they do not need to make repayments. The interest accumulates and gets added to the principal. If the owner dies, then their family must repay the reverse mortgage fully from the estate. Sometimes an owner may wish to sell the house, possibly to relocate to another place or an aged care home. In this scenario, the loan must be fully repaid. 

Reverse mortgage risks

Reverse mortgages carry several risks and shouldn’t be entered into without doing research. Interest and fees can add up quickly and over time, the interest may outweigh the equity. It’s often worth getting financial or legal advice before applying for a reverse mortgage. 

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This article was reviewed by Kate Cowling before it was published as part of RateCity's Fact Check process.

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