What it means
A reverse mortgage lets older homeowners borrow against the value of their home and repay only when they sell, move out or pass away. The borrower can take the money in different ways, such as a lump sum, a line of credit or monthly payments.
Under a tenure plan the monthly payments continue as long as at least one borrower stays in the home as a principal residence. Because nobody knows how long that will be, the lender sets the payment at a level designed to be sustainable.
The word "tenure" refers to the length of time the borrower occupies the property. The key benefit is a predictable income stream, which suits retirees who want to cover living costs without selling their home.
The cost sits in the growing balance. Each month the lender adds the payment, interest and any fees to the loan, so the amount owed rises over time while the homeowner's equity (the value of the home minus the debt) falls.
The main alternative is a term payment plan, which pays a larger amount over a set number of months. A tenure plan pays less per month but lasts as long as the borrower stays, so it manages the risk of running out of payments too early.
Cost matters here. Reverse mortgages usually carry upfront fees, ongoing interest and an insurance charge, all of which are added to the balance rather than paid in cash.
Comparing the total cost with alternatives, such as downsizing or a conventional loan, is an important step before committing.
In practice
Real-world examples.
Example
A retired teacher owns her home outright but has modest pension income. She chooses a tenure plan that pays $900 a month, which covers her utility bills and groceries. She keeps living in the house and plans to leave the rest of the equity to her family. She also checks each year that the lender's occupancy requirements are being met.
Example
A widower in his seventies wants steady income to pay for care visits at home. His financial adviser compares a tenure plan with selling the house and downsizing. He picks the tenure plan because it avoids moving costs and keeps him in familiar surroundings. He keeps a record of the growing balance so his family understands what the loan will cost.
Example
A couple uses a reverse mortgage tenure plan to top up their pensions. One partner later moves into a care home permanently, and the lender reviews whether the home is still their principal residence. The review shows why occupancy conditions matter. The couple takes advice on what happens to the payments if one partner moves out.
Formula
Calculation
New balance = opening balance + monthly payment + interest and fees for the month
A borrower has a loan balance of $60,000 and receives a monthly tenure payment of $800. The combined annual rate for interest and insurance charges is 6.5%.
Monthly charge = 60,000 x 0.065 / 12 = $325
New balance = 60,000 + 800 + 325 = $61,125
After one month the borrower has received $800 in cash, and the debt has increased by $1,125.
Repeating the calculation each month shows how the debt compounds: interest is charged on a balance that already includes earlier interest.Case study
Seen in the real world.
Whitmore Retirement Advisers is an illustrative, fictional firm that helps older homeowners compare their options. A client, Mr Ellison, owned a home worth $400,000 and wanted $1,000 a month for living costs.
The adviser modelled a tenure plan and showed Mr Ellison that after ten years the loan balance would be much higher than the $120,000 he had received, because interest had been added every month. She also showed that his remaining equity would still be substantial.
Mr Ellison chose the plan with a clear understanding of the trade-off. The illustrative point is that the monthly cheque looks small, but the compounding balance is the real cost. He also kept a short letter in his files explaining the arrangement to his children, so there would be no surprises later.
Watch out
Common mistakes.
- Believing the payments continue regardless of where the borrower lives, when the home must usually remain the principal residence. Moving out for a long period, for example into care, can end the occupancy that the plan depends on.
- Ignoring the growing loan balance, which can reduce what heirs receive. Whether any value is left for heirs depends on the sale price and the balance at that time.
- Assuming a tenure plan and a term plan pay the same amount each month. A tenure plan usually pays less each month because it is designed to continue for as long as the borrower stays.
Questions
People also ask.
How is a tenure plan different from a term plan?
A tenure plan pays smaller amounts for as long as the borrower occupies the home, while a term plan pays larger amounts for a fixed number of months.
What happens when the borrower leaves the home?
The loan normally becomes due, and it is repaid from the sale of the property or by other means.
Can the plan be changed later?
Often the payment option can be switched for a fee, although rules depend on the lender and the type of loan. The lender will check that the new plan still fits within the borrowing limit.
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