Reverse mortgage: how to turn your home into liquid funds in retirement

With a regular mortgage, the route is familiar: you borrow money from a bank to buy a home and make a fixed monthly payment that reduces the debt.

With a reverse mortgage, the process is reversed:

• You retain ownership: The home is already fully owned by you.
• The money flows to you: A bank or insuranceA contract under which an insurance company undertakes to compensate the insured in the event of damage in exchange for a periodic payment. company grants you a loan, as a lump sum or monthly payment, based on the value of the home.
• A lien is registered: The home remains registered in your name and you continue living in it, but a lien is registered in favor of the lender.

The main difference is that, in most cases, there is no ongoing monthly repayment. The entire debt is deferred and repaid only at an end point—for example, when the home is sold, when the borrowers move to assisted living, or after their death. The Bank of Israel describes this tool as a way to turn fixed home equity into available, liquid income without losing the roof over your head.

A reverse mortgage is not a tool to take “just because you can” or to finance extravagant luxury vacations. It should serve a clearly defined strategic purpose. It is mainly suited to the following situations:

• Supplementing income: Retirees whose pensionA monthly payment made to a person after retirement from work in order to help maintain their standard of living. is low and who want to maintain a dignified standard of living.
• Health and long-term care: Financing complex medical treatment, close nursing assistance, or accessibility adaptations to the home.
• Closing suffocating debts: Replacing expensive short-term loans, such as credit-card debt or general-purpose loans, with a long-term loan that protects continued residence.
• Helping children: Giving children a down payment now, when they need it to buy their own home, instead of making them wait decades for an inheritance.

The amount you can receive is not uniform. It is based on several main factors:

• The home’s current market value, as determined by a real-estate appraiser.
• The borrowers’ age: Here the rule of thumb is the reverse of the usual one—the older you are, the higher the loan-to-value ratio, or LTV, that may be approved.

Why? From the lender’s perspective, the expected loan period is shorter and its risk is lower.

• Existing debt: If a small mortgage is already registered on the property, the first money released through the reverse mortgage will be used to repay it and remove the earlier lien.

With a regular mortgage, the cost is visible—it leaves your bank account every month. With a reverse mortgage, the absence of a monthly payment can easily create the psychological illusion of “free money.”

This is precisely where the largest financial danger lies:

The interest does not disappear. It is deferred and added to the loan principal each month, in structures professionally described as balloon, grace, or bullet loans. This creates compound interestA situation in which the returns accumulated on an investment are reinvested and generate additional returns themselves, creating accelerated growth of the money over time.: you pay interest on interest that has already accumulated. If market interest is high or the loan is linked to the Consumer Price Index, the debt can grow at an accelerating pace over the years.

The home remains owned by the borrowers, but a lien is registered in favor of the lender. As long as the agreement’s terms are met, the borrowers can generally continue living in the home.

When the loan becomes due, there are several options:

1. Repay the debt from other financial resources.
2. Sell the home and repay the debt from the proceeds.
3. Allow the heirs to settle the debt themselves if they want to keep the home.

If a surplus remains after the home is sold, it should remain with the owners or their heirs. But as the debt grows over the years, this surplus may be much smaller than you imagined.

A reverse mortgage is not only a cold financial decision. It can become a family flashpoint.

On the one hand, as parents you have every right to use an asset you worked for all your lives in order to live with dignity, finance nursing assistance, or give your children an “inheritance during your lifetime” when they need it. On the other hand, if you do not tell them, the children may discover later that most of the family property must be sold to a financial institution to cover the accumulated debt.

There is one critical point you must not miss: if you are a couple, check what the agreement says will happen when one of you dies.

Is the surviving spouse fully protected and able to continue living in the home without concern? Can the lender demand immediate repayment of half the debt? Make sure the agreement clearly states that the lien and repayment are fully deferred until both spouses have left the property or died. Do not compromise on this clause.

A reverse mortgage is a powerful tool, but it should not automatically be your default. Before signing, examine these alternatives:

• Downsizing: Sell the large home, move to a smaller, more accessible, and less expensive home, and use the substantial remaining cash to fund daily life.
• A family loan: If the money is intended to help the children, or if the children have the means to help with your medical costs, it may be better for them to lend you the money directly. This can avoid heavy compound-interest payments to financial institutions.
• Renting out and moving: Rent out the current home at a high price and move to a less expensive rental or assisted living, using the monthly difference.

There is no single solution for everyone. Someone who wants to remain in the home at almost any cost may view a reverse mortgage as a good solution. Someone prepared to move to a smaller home may find a simpler and less expensive answer.

1. Bank of Israel — Reverse mortgage: helping older people through the capital market — A general explanation of turning the value of a home into income or available funds without leaving it.
2. Bank of Israel — Restrictions on housing loans — General instructions and definitions concerning housing loans, including grace, balloon, and bullet loans.
3. Capital Market Authority — Disclosure in a loan agreement — Instructions on the details a credit provider must disclose to a borrower in a loan agreement.
4. The Knesset — Fair Credit Law — The law governing various aspects of loans, disclosure, and credit terms.