Have you ever heard of a reverse mortgage? It’s a financial tool that has been gaining significant popularity in recent years, especially among senior homeowners on the Gold Coast. Imagine being able to access the equity you’ve built up in your home without having to sell or downsize. Sounds intriguing, doesn’t it?
How does a reverse mortgage work in Australia, and can I have access to reverse mortgage lenders if I ever need one? Stay with me as I answer these questions and walk you through the top 6 things you need to know about a reverse mortgage.
Talk to PhilWhat is a reverse mortgage?
In a nutshell, a reverse mortgage is a unique type of loan that allows homeowners, typically those aged 60 and older, to convert a portion of their home equity into tax-free cash. Unlike traditional mortgages, where you make monthly repayments to the lender, with a reverse mortgage, the lender actually pays you, turning the tables on the borrowing process. It’s like unlocking the value of your home and turning it into a financial resource to support your retirement dreams or meet unexpected expenses.
How does a reverse mortgage work?
Instead of making regular payments, the loan balance increases over time, while the equity in your home decreases. You retain ownership of your home, and the loan is repaid when you sell the property, move out, or pass away. It’s a flexible financial solution designed to provide homeowners with extra funds and financial security during their golden years.
Now that you have a general idea of what a reverse mortgage is and how it works, let’s dive deeper into the top six things you need to know about this unique financial tool.
Top 6 things to know about a Reverse Mortgage
1. How much can you borrow from reverse mortgage loans?
When it comes to reverse mortgage loans, the amount you can borrow is primarily determined by your age and the value of your home. Generally, if you’re 60 years old, the maximum amount you can borrow is likely to be around 15-20% of your home’s value. As you get older, you become eligible to borrow a larger proportion of your home’s value.
As a rule of thumb, you can add 1% for each year over 60. So, if you’re 65, the maximum borrowing amount may increase to about 20-25%.
The minimum amount you can borrow varies among lenders but is typically around $10,000. The flexibility of a reverse mortgage allows you to choose how you receive the borrowed funds. You can opt for a regular income stream, a line of credit, a lump sum payment, or a combination of these options.
It’s important to note that reverse mortgages are generally not available for younger homeowners. The borrowing ability and the increase in loan amount are linked to your age. To gain a better understanding of how much you can borrow and the potential impact on your home equity over time, you can use ASIC’s Moneysmart reverse mortgage calculator.
2. Will I lose my property to the lender under the reverse mortgage scheme?
No, you will not lose your property to the lender under the reverse mortgage scheme. It is a common misconception that the bank will take ownership of your property. In reality, as a borrower, you remain the full legal owner of the property, and the lender holds a mortgage on it. Your name will continue to be on the title, just like with any other traditional mortgage.
The lender’s interest is registered on the property, similar to a conventional mortgage loan. As long as you fulfill your obligations and do not default on the agreement by breaching key terms, the lender cannot force the sale of your home. Default conditions can vary between lenders, but they generally include factors such as failure to pay council rates, inadequate property insurance, or intentional neglect or damage to the house.
The reverse mortgage arrangement is designed to provide you with the financial benefits of accessing your home’s equity while allowing you to retain ownership and occupancy.
3. Pros and cons of a reverse mortgage loan
PROS
- A reverse mortgage provides you with access to the equity in your home, giving you financial flexibility to meet your needs and improve your quality of life.
- With a reverse mortgage, you’re not required to make regular repayments. The loan is typically repaid when you move out of the home permanently, sell the property, or pass away.
- You retain full ownership of your home, and the lender takes a mortgage interest on the property.
- Reverse mortgages taken out after 18 September 2012 in Australia have negative equity protection, ensuring that you can’t owe the lender more than the market value or equity of your home.
- Protections and limitations are in place to prevent reverse mortgage borrowers from falling into financial traps.
CONS
- Interest rates and fees for reverse mortgages are generally higher than standard home loans. The compounding interest over the loan term can cause your debt to rise quickly.
- Taking out a reverse mortgage may affect your eligibility for pension benefits. It’s important to consider the potential impact on your overall financial situation.
- Drawing funds from your home through a reverse mortgage may reduce the available funds for future needs, such as aged care or other expenses.
- If you’re the sole owner of the property and someone is living with you, that person may not be able to stay in the home after your passing.
- If you choose to fix your interest rate, breaking the agreement may result in high costs.
4. When does the loan have to be repaid?
The reverse mortgage loan must be repaid when you move out of the home permanently, pass away, or sell your property. The repayment is typically made from the proceeds of selling your home, and any remaining balance is retained by you or your estate. If someone else is living with you in the home, they may be required to move out when the loan needs to be repaid.
In general, repayment is triggered by no longer using the home as your principal residence, failure to pay property taxes or homeowners insurance, or neglecting the maintenance of the property.
5. Is it possible to owe the reverse mortgage provider more than what your home is worth?
Short answer: no. You are protected by what we call the No Negative Equity Guarantee under the National Consumer Credit Protection Act if your reverse mortgage was taken out after 18 September 2012.
However, if you obtained a reverse mortgage before this date, it’s important to review your contract to determine if it includes negative equity protection. If your contract does not include this provision, it is advisable to discuss the situation with your lender or seek independent advice to understand your options and potential steps to take.
The negative equity protection provided by the guarantee offers a safeguard to borrowers, ensuring that even if the value of your home declines over time, you will not be held responsible for paying back more than the home’s worth.
6. What must you consider before applying for a reverse mortgage?
- Repayment Obligations: While you are living in your home, you are not required to make repayments. However, once the property used as security is sold, the entire loan balance, including interest and any ongoing fees, needs to be repaid in full.
- Loan Balance and Interest: Reverse mortgage interest rates are calculated on the daily outstanding balance and added monthly to your loan account. As a result, your loan balance will gradually increase over time.
- Repayment Timeframe: If you permanently move out of your home, the entire loan balance becomes due within 12 months. It’s important to plan for this repayment obligation to avoid any financial strain.
- Equity Drawdown: The amount of equity you can access through a reverse mortgage depends on various factors such as your age, property value, and loan approval criteria. Drawing funds from your property now may reduce the amount you can potentially access in the future.
- Variable Interest Rates: Keep in mind that the interest rates on reverse mortgages can fluctuate over time, leading to changes in the amount you are charged.
- Impact on Eligibility: Consider the potential impact on your eligibility for government benefits, such as the Age Pension. Reverse mortgages may affect your entitlements, so it’s advisable to understand the consequences for your specific circumstances. Seeking guidance from a qualified financial or tax adviser can provide valuable insights.
- Consideration for Others: If you have cohabitants or beneficiaries living with you, it’s important to think about their position and the impact on them if you pass away. Since your home is often a significant asset to be inherited, careful consideration is needed.
Before deciding on anything, its best to consult with a qualified mortgage broker experienced in reverse mortgages and have them explain to you what’s in the fine print.
Applying for a reverse mortgage?
My team and I at Professional Lending Solutions can help you with your application. We’re also open to answering questions you may have regarding this type of financial commitment. Click the button below to speak to myself and my team.
Talk to Phil
Phil’s journey from banking to mortgage brokering reflects a career driven by a commitment to personalised service and tailored financial solutions. With a distinguished background in banking, including roles at NAB, ANZ and Lloyds TSB Bank in the UK, Phil spent 12 years developing expertise in personal and commercial finance, while also completing a Bachelor of Business (Finance), followed by an MBA majoring in International Business.