A guide to reverse mortgages

By Ericka Pingol

If you are an older borrower wanting to access more cash to pay for medical expenses, renovations, or to simply better finance your lifestyle, you may have thought about getting a reverse mortgage. This type of loan allows pensioners and retirees (age 60 and over) to borrow against their home’s equity.

While there is no required income to qualify for a reverse mortgage, lenders are required by law to lend money responsibly, so not everyone may be eligible for this type of loan.

With reverse mortgages, the amount one can borrow depends on two key factors:

  • The agreed value of the property done by an independent evaluation
  • The age of a borrower. Or, if they are a couple, the age of the younger borrower

In general, the maximum amount a borrower may obtain using a reverse mortgage is 50% of the agreed value of their house. The minimum amount they could borrow is usually around $10,000. However, how much you can borrow still depends on your lender’s policies.

Costs and fees

As with most loan products in the market, a reverse mortgage entails various fees. Some of these are:

  • Upfront fees including the application fee, settlement fee, and legal fee
  • Ongoing fees include any other annual, monthly, or fortnightly fees
  • Discharge fees include exit fees and break costs

Aside from these, you have to pay for your loan's interest rates. In general, the rate you may have to pay is around 1% higher than traditional home loans.

The risks

As a retiree looking to borrow money against their home equity, a reverse mortgage may work for you. However, you must be aware of the risks it involves. Borrowers can struggle to recognise the long-term risk of their loan, according to a review of reverse mortgage lending conducted by the Australian Securities & Investment Commission.

Some of the risks you may face when you take out this type of loan are:

  • Interest rates and fees are generally higher than standard home loans
  • Your debt can rise quickly as a result of the interest compounding over the term of the loan
  • It may affect your pension eligibility
  • You may not have enough money for aged care or other future needs
  • If you are the sole owner of a property and someone is living with you, that person may not be able to stay there when you die
  • If you fix your interest rate, the costs to break your agreement can be very high

Negative equity protection

Negative equity protection means you cannot end up owing a lender more than your home’s value. This was introduced by the Government in September 2012.

When the reverse mortgage contract ends and your house is sold, the lender will receive the proceeds of the sale and you cannot be held liable for any debt above this (except in circumstances such as fraud or misrepresentation). If your house sells for more than the amount you owe to the lender, you or your estate will receive the extra funds.

If you entered a reverse mortgage before 18 September 2012, check your contract to see if you are protected in circumstances where your loan balance ends up greater than the value of your house.

Is a reverse mortgage right for you?

Now that you have more information about a reverse mortgage, you need to ask yourself if this would work for you and your financial situation. Some of the things you may consider in your decision are:

  • The impact on your pension. It may be best to think long and hard about how this type of loan would affect your pension entitlement. As with any type of loan, a reverse mortgage entails financial responsibility. Consider discussing the potential impact of a reverse mortgage with the Department of Human Services’ Financial Information Service.
  • Loan payments. Ask yourself—how would I take the loan? You could take the funds as a lump sum, a regular income stream, or a line of credit. It may be ideal to consider what option may work the best for you. Use our income and expenditure worksheet to have a rough idea where repayments for your loan would fit.
  • Your future expenses. Think about your future needs and how you would afford them. Your health and living situation might change in the coming years—or even as early as now. It is important to plan for extra costs you may incur such as medical expenses and aged care. This way you could save an ample amount of money to cover them.
  • Independent legal advice. Ask your legal adviser to explain the fine print of the reverse mortgage contract so you will understand the consequences of breaching any terms and conditions.

To find out if this loan is for you, use ASIC’s reverse mortgage calculator.

Check the fine print

You still have to double check (and even triple check) some information about reverse mortgage and your contract before signing. Some of the things you must check are:

  • Information statement. Your credit provider (or assistant provider) must give you a reverse mortgage information sheet that includes details such as:
    • How a reverse mortgage works
    • How costs are calculated
    • What to consider before taking out a reverse mortgage
    • Useful contacts for more information
  • Projections. A reverse mortgage projection may help determine the long-term impact of the loan to your finances. Your credit provider must go through the calculations with you in person before you take out the loan. These projections will illustrate the effect a reverse mortgage may have on the equity in your house over time and show the potential impact of interest rates and house price movements.
  • Security. Find out if the lender will accept a holiday home or investment property as security so your family house can remain debt-free, as well as if there are any special arrangements if your house is already mortgaged.
  • Special terms and conditions. Ask if there are any restrictions on what you can do with the money.
  • Cooling-off period. This is a period in which you can get out of a contract, should you change your mind. rules on this period vary between states and territories, but details on this will be included in the contract.
  • Life changes. Find out what happens if you need to transfer the loan to another house when you move, as well as if you or your spouse dies. Make sure to check if you will need permission fro the lender to sell, lease, vacate, or renovate your house or have someone move in with you.
  • Non-title-holding residents. If you are the homeowner and someone else lives with you, the other residents may have to move out when the loan becomes repayable. In some cases, reverse mortgage contracts may protect the rights of the other (non-title-holding) residents by allowing them to stay in the house. If you want this option, make sure you discuss it with your lender before getting a reverse mortgage.

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