A reverse mortgage allows a homeowner who has paid off their property to borrow money using the equity as collateral.
This is a type of home loan available to Australians aged 60 and over, and it helps people who have exhausted their savings and sources of income. In other words, someone who is asset-rich but cash-poor.
Interest is charged on a reverse mortgage as with any loan, but the borrower is not required to make any repayments. That said, voluntary payments are possible.
How does a reverse mortgage work?
A person with a reverse mortgage stays in their home and does not make repayments. Interest is charged on the loan and the interest rate is usually higher than a standard home loan. The loan must be repaid in full, plus fees and interest, when the home is sold on the person’s death.
Reverse mortgage lenders apply different criteria, but generally as a person ages they can access a greater proportion of the equity in their home.
“There are pretty strict loan-to-value (LVR) guidelines that borrowers can release,” says Darren Moffatt, Founder and CEO of Seniors first. “Everything is determined by age and linked to life expectancy.”
For example, a person over the age of 60 may have access to funds worth 15% or 20% of the total property value. As a guide, add 1% for each year after age 60.
What are the advantages ?
Perhaps the greatest benefit of a reverse mortgage is that it allows a person to stay in the home they love. You don’t have to sell the house to free up some cash.
It also comes with a negative equity guarantee, which means that even if a property loses value to the point that it is worth less than the loan (known as “negative equity”), the borrower will not owe any additional money on the loan.
“Reverse mortgages are the most regulated financial credit product in Australia. There are very strong consumer protections written into the regulations, one of which is a non-negative capital guarantee,” says Moffatt.
To benefit from the guarantee, three conditions must be met. Council rates must be paid on time, the property must be insured and any necessary repairs must be carried out.
What are the disadvantages ?
A reverse mortgage can be costly if the wrong loan structure is chosen for your situation. Choose a lender carefully and weigh the different alternatives they offer. A reverse mortgage is more complex than a standard home loan.
“Will you take a lump sum or a reserve of money? You don’t want to unnecessarily incur more interest charges than necessary,” says Moffatt.
What to consider before applying
Moffatt encourages families to talk about the possible implications of a reverse mortgage. Moffatt encountered a small minority of children who focus more on the size of their inheritance than on the day-to-day financial needs of their parents.
“In our experience, adult children and recipients are generally very supportive of parents using these loans,” Moffatt says. “But there were times when the kids weren’t super happy. It is better to put everything on the table before embarking on this kind of loan.
There are also potential implications for the old-age pension that need to be taken into account.
“In the vast majority of cases, borrowing funds through a reverse mortgage will not affect the old age pension. It depends on the use of the funds,” says Moffatt.
If the funds are used to give money or make an investment, they can be valued according to the asset test and reduce the amount of the pension. Always check with Centrelink first.
How to qualify for a reverse mortgage
A reverse mortgage is not subject to income conditions. It is accessible to people over 60 who own their home.
In addition to a reverse mortgage, there are several ways to leverage the equity in your home:
equity release agreement
sharing of the proceeds of the sale of the house (reversion of the house)
Home equity release
An equity release agreement allows you to sell a portion of a home’s value. The owner receives a lump sum or installment payments while continuing to live in the house. Fees are paid on the part that has been sold and the proportion of owner’s equity decreases over time, which covers the fees paid.
Sharing of the proceeds of the sale of the house (reversion of the domicile)
Also known as house reversion, this allows the owner to sell a “share” or “transfer” (in other words, a proportion) of the future value of the house while remaining in it. A lump sum is paid to the homeowner, who keeps the remaining equity in their home.
Home Equity Access Program
Formerly known as the Pension Loans Scheme, it is provided by the government through Services Australia and the Department of Veterans’ Affairs. Qualifying older Australians can receive a tax-free voluntary fortnightly loan, which can be used to supplement their retirement income.
Is a reverse mortgage a good idea?
If the correct loan structure is obtained, a reverse mortgage offers a way to stay in the family home instead of selling it to raise cash to live on. For many people, this is a huge advantage. Others may prefer to downsize.
How much can I borrow on a reverse mortgage?
What are the costs of a reverse mortgage?
What is the Reverse Mortgage Interest Rate?
Who offers reverse mortgages?
Do you have to pay off your mortgage in full to get a reverse mortgage?