A reverse mortgage is a loan available to seniors, and is used to release the home equity in the property as one lump sum or multiple payments. The home owner's obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves (i.e. into aged care).
In a typical mortgage, the home owner makes a monthly amortized payment to the lender; after each payment the equity increases within their property, and typically after 30 years the mortgage is paid in full and the property is released from the lender. In a reverse mortgage, the home owner makes no payments and all interest is added to the lien on the property. If the owner receives monthly payments, then the debt on the property increases each month.
If a property has increased in value after a reverse mortgage is taken out, it is possible to acquire a second (or third) reverse mortgage over the increased equity in the home. But in certain countries, a reverse mortgage must be the first and only mortgage on the property.
When does the loan end?
The loan ends when the homeowner dies, sells the house, or moves out of the house for 12 consecutive months or more (for example, to go into an assisted living home). At that point, the reverse mortgage can be paid off by the proceeds of the sale of the house, or refinanced by the heirs of the homeowner's estate. If the proceeds exceed the loan amount, the owner of the house (if moving out or selling) receives the difference; if the owner has died, the heirs receive the difference. For cases where the proceeds are not sufficient to pay off the loan, then the bank (or insurance that the bank has, on the loan) makes up the difference.
In most cases when the borrower moves out of the property or passes away, as long as the borrower (or their estate) provides proof to the lender that they are attempting to sell the home or obtain financing to pay off the outstanding debt, the investor will allow them up to one year to do so. After the one year extension period is up, the lender cannot provide any further extension of time to the borrower (or estate).
The technical term for this cap on debt is "non-recourse limit." It means that the lender does not have legal recourse to anything other than the value of the home when the loan is to be paid off.