Reverse mortgage products allow people over 60 to borrow against the equity in their home. Repayment, including all interest and charges, is not due until the last borrower either passes away or decides to sell the home.
The amount of money seniors can borrow is calculated on two key factors – the agreed value of the property through an independent evaluation, and the age, or the youngest age of a borrower if they are a couple.
Typically the maximum a borrower can obtain using a reverse mortgage is 50% of the agreed value of their home. The minimum amount borrowers can access is usually around $10,000.
Like any financial product it’s important for seniors to understand all the facts when considering a reverse mortgage and to discuss their situation with a financial planner and their family to make sure that it’s the best solution for them.
Key considerations that seniors should investigate include how they will draw on the loan, how interest will be calculated, how the loan will impact on their aged care/Centrelink payments and how seniors can ensure that they have enough cash left to give to their estate or to fund aged care needs.
Once a reverse mortgage has been approved, seniors are entitled to spend the loan however they like – but there are a number of options that can help them manage the loan efficiently and effectively.
They can receive the money as a lump sum, monthly income, via a drawdown facility or a combination of all three.
Interest rates for reverse mortgage loan products are generally around 1% higher than traditional mortgage loans. While seniors do not have to make any repayments during the life of the loan, it is important to consider how the interest on the loan will be calculated.
They can make repayments if they wish, but usually the loan is repaid when the property is sold.
A financial planner can help explain how interest will be calculated on the loan to help seniors choose the most appropriate option to draw down on the loan. Borrowers can choose to set up a drawdown facility if they are unsure of how much money they will need. This means that the additional money can be accessed but does not attract any interest charges until the money is used.
If seniors choose to use their reverse mortgage as a lump sum and don’t spend the money straight away, it could affect the amount of money they receive from Centrelink.
Seniors receiving more than $3,588 a year will lose 40 cents from every dollar of their pension. It’s important therefore to make sure that their reverse mortgage loan is structured properly if they don’t want to lose their government stream of income.
Most seniors will want to leave an amount of money for their children or may need to have some money set aside to pay for medical bills or aged care needs.
Seniors can put in place protected equity options to ensure that a percentage of the value of the home will be left when the loan is finalised (regardless of interest rates).
If your superannuation balance falls short of what you need for a comfortable lifestyle but you have built up significant equity in your property, a reverse mortgage will provide you with a retirement income stream, while you retain ownership of your home.
Reverse mortgages are generally more expensive than traditional mortgages and can be restrictive. If you’re not making regular repayments each month, you are not reducing your debt but accumulating interest.
To avoid owing more than the value of your property, make sure you get a reverse mortgage that offers no negative equity guarantee.
Retirees who own their home but do not have enough cash to live on.