Reverse Mortgages

Reverse mortgage are nothing to be afraid of.

 

Reverse Mortgages are best explained on the following Money Smart Government Website;

(Extract from Money Smart Government Website)

 

A reverse mortgage allows you to borrow money using the equity in your home as security. If you're age 60, the most you can borrow is likely to be 15–20% of the value of your home. As a guide, add 1% for each year over 60. So, at 65, the most you can borrow will be about 20–25%. The minimum you can borrow varies, but is typically about $10,000. Depending on your age, you can take the amount you borrow as a:

  • regular income stream
  • line of credit
  • lump sum, or
  • combination of these
  •  

How a reverse mortgage works

 

You stay in your home and don't have to make repayments while living there. charged on the loan over time, so it gets bigger and adds to the amount you borrow. You repay the loan in full, including interest and fees, when you sell or move out of your home. You may be able to make voluntary repayments earlier, if you wish. You may also be able to protect a portion of your home equity from being eroded by the loan. For example, to ensure you have enough money left to pay for aged care.

 

What a reverse mortgage costs

 

The cost of the loan depends on:

  • how much you borrow
  • how you take the amount you borrow (for example, a lump sum will cost more due to compounding interest)
  • the interest rate and fees (for example, loan establishment, ongoing fees, valuation)
  • how long you have the loan

A lender will go through reverse mortgage projections with you, showing the impact on your equity over time. They will give you a copy of this to take away, so take your time to digest it. Ask questions if there's anything you're not sure about.

 

Pros and cons of a reverse mortgage

 

Pros

  • You remain owner of your home and continue to live in it.
  • A small amount of money each year could supplement your income in retirement.
  • A lump sum may fund renovations on your home so you can stay in it longer.
  • You could free up money for an urgent need, such as medical treatment.
  • It may help secure aged care accommodation until you sell your home.

 

Cons

  • Over time, your debt will grow and your equity will decrease (see our case study below).
  • Interest and fees compound and add considerably to your loan balance.
  • The interest rate is likely to be higher than on a standard home loan.
  • It could affect your eligibility for the Age Pension.
  • It could affect your ability to afford aged care.
  • It could eat into money you need for future medical bills or home maintenance.
  • You may not have enough money left for living expenses or to support family, if needed.
  • If you’re the sole owner of your home and someone lives with you, that person may not be able to stay when you move out or die.
  • If you are borrowing to invest, it puts your whole home at risk — not just the portion you are investing.

 

Negative equity protection

 

Reverse mortgages taken out from 18 September 2012 have negative equity protection. This means you can't end up owing the lender more than your home is worth (market value or equity). If you took out a reverse mortgage before this date, check your contract. If it doesn't include negative equity protection, talk to your lender or get independent advice on what to do.