A reverse mortgage involves a secured loan which gives the lender an interest in the unencumbered value of your home (being the market value of your property, less any debt secured against that property), commonly known as the “equity” in your home. Accessing funds through this type of loan is used by some retirees as an alternative to downsizing.
How it works
Put simply, under a reverse mortgage loan a lender agrees to advance money to you in consideration for an interest in the equity of your property, proportionate to the loan amount.
In 2012, negative equity protections were introduced by the Federal Government to protect homeowners from over-borrowing funds under reverse mortgages and ensuring lenders are not entitled to an amount in excess of the value of your home at the end of your loan term. This means you will not be able to borrow more than the unencumbered value of your property (as determined by the lender), although you may choose to borrow a lesser amount.
Unlike a traditional mortgage loan, you are normally not required to repay the loan during the loan term (although you may choose to). Rather, your repayment obligation pursuant to a reverse mortgage loan would arise:
- if the property is sold;
- if the mortgagor(s) move out of the property (e.g. to an aged care facility); or
- upon the death of the mortgagor(s).
Eligibility
Generally, only homeowners over the age of 60 are eligible for reverse mortgages because borrowing potential is dependent on the unencumbered value of the property. The higher the unencumbered value, the greater the loan amount that may be considered by the lender.
If there are significant encumbrances on the title of the property and there is little to no unencumbered value left, then a reverse mortgage may not be feasible, even if the homeowner is over the age of 60. It is prudent that you obtain the appropriate financial advice in this regard.
In most instances, the lender would require a registered first mortgage over the property and request that all other encumbrances be removed.
Why consider a reverse mortgage?
A reverse mortgage loan allows you to “cash in” the unencumbered value in your property, which is otherwise generally inaccessible. It seems that retirees may opt for reverse mortgages in various circumstances, including where they:
a) need access to a lump sum:
i. for medical emergencies;
ii. to travel; or
iii. to carry out renovations or upgrades to their home;
b) require an alternate source of income to assist with living expenses; and/or
c) wish to continue living in their family home instead of moving to a retirement village.
A reverse mortgage loan may be suitable in various circumstances because of its flexibility. Depending on your needs, circumstances and the lender, you may be able to elect to receive the loan as:
a) a lump sum;
b) instalments;
c) a line of credit (i.e. money available under your loan but not yet drawn); or
d) as a combination of the above.
Things To Watch Out For
It is essential, and a requirement for most lenders, that you obtain independent legal and financial advice prior to entering into a reverse mortgage agreement. Reverse mortgage loans can involve complex terms which can adversely impact you and your family in the long term. Some considerations are summarised below.
1. Interest
Unlike a traditional mortgage loan, interest under reverse mortgages can be compounded, meaning you pay interest on the principal and on the accrued interest. If you do not make any repayments during the loan term, the interest payable at the end of the term will be significantly higher. If the interest rate under your loan is variable, the amount of interest can increase exponentially when compounded.
For example, if you are a 60-year-old homeowner with no mortgage and your property is worth $1,000,000.00, you may be eligible to borrow up to $200,000.00 under a reverse mortgage loan. If you borrow the full $200,000.00 as a lump sum and the interest rate is fixed at 7% per annum, the total amount owing to the Lender in 15 years’ time will be $569,789.00.
A free reverse mortgage calculator is available at moneysmart.gov.au to assist with estimates and calculations in relation to reverse mortgage loans.
2. Restrictions in dealing with your property
While you continue to live in your home, a reverse mortgage imposes several restrictions on how you may deal with your property. While each Lender’s restrictions may differ, generally speaking, you will likely need to seek the Lender’s consent to:
a) lease or sell your property;
b) leave your property vacant for an extended period of time;
c) demolish, renovate or alter your property; or
d) allow others to stay in your home for extended periods of time.
3. Eligibility for other post-retirement benefits
Depending on the circumstances, a reverse mortgage may affect your eligibility for other retirement benefits such as Age pension and Home Equity Access Scheme or your ability to afford aged care services in your later years. Therefore, it is important you obtain assistance and advice from the appropriate expert to consider these factors.
You should therefore always obtain independent legal and financial advice to understand the risks involved and to determine whether a reverse mortgage is appropriate for you before proceeding.
More Information
If you or someone you know requires advice regarding a reverse mortgage, please phone us on (02) 9635 7966 or visit our website: www.matthewsfolbigg.com.au.
