A reverse mortgage is a financial product available to Australian homeowners aged 60 and over, allowing them to access the equity in their home (being the value of your home, less any money you owe on it) without the need to sell it.
This type of loan can provide additional funds for various purposes, such as supplementing retirement income, covering medical expenses, funding home renovations or helping children or grandchildren buy their first home.
According to the Australian Government’s Moneysmart website, if you are age 60, the most you can borrow is likely to be 15–20% of the equity of your home. Generally speaking, your borrowing power will increase by 1% for each year you are over the age of 60. For example, at 65, typically the most you can borrow will be about 20–25% of the equity of your home.
How a Reverse Mortgage works
A reverse mortgage allows you to stay in your home and not have to make repayments while continuing to live there. Interest charged on the loan compounds over time, so it gets bigger and adds to the amount you have borrowed. It is important to note that the interest rate on a reverse mortgage is likely to be higher than on a standard home loan.
Eligible borrowers can receive funds as:
Unlike a traditional home loan, a reverse mortgage does not require a borrower to make regular repayments. The loan, along with accrued interest and fees, is typically repaid:
The benefits of a Reverse Mortgages
Access to Home Equity: Provides funds without the need to sell the home, allowing homeowners to benefit from their property's value while continuing to live in it.
No Mandatory Repayments: Borrowers are not required to make regular repayments, easing financial pressure during retirement.
Flexible Fund Access: Options include receiving funds as a lump sum, regular income, or a line of credit, catering to different financial needs.
Government Protections: Reverse mortgages taken out from 18 September 2012 include a negative equity protection meaning that you can't end up owing the lender more than your home is worth (market value or equity).
No Income Required to Qualify: As opposed to many other loan options, with a reverse mortgage you don’t need to have an income to qualify. This is because the loan is secured by the equity of your home.
This advantage is particularly true for retirees who no longer have a regular income stream but need to access cash for their various needs without the pressure of proving income for loan approval.
This means that the amount you owe on a Reverse Mortgage won’t increase due to a decrease in your home’s market value if the real estate market takes a dip.
The drawbacks of a Reverse Mortgages
Compound Interest: Interest compounds over time, which can significantly increase the loan balance and reduce the remaining home equity.
Reduced Inheritance: As the loan balance grows, the amount of equity left in the home decreases, potentially reducing the inheritance you can leave to your children or other beneficiaries.
Impact on Government Benefits: Accessing a lump sum or regular payments from a reverse mortgage may affect eligibility for the Age Pension and other government benefits.
This will be dependant on how much you decide to borrower and the relevant assets and means test applied by the Australian Government at the time of borrowing. It’s important to speak to a financial advisor about this.
Higher Interest Rates: Reverse mortgages often have higher interest rates compared to standard home loans, increasing the overall cost of borrowing. This is because the lender is taking on more risk since they don’t receive payments until the house is sold or the last borrower moves out or passes away.
Fees and Charges: Often, Reverse Mortgages come with higher set of upfront fees. These may include (but not limited to) application fees, legal fees, and property valuation costs. There may also be further ongoing service fees, which may apply throughout the life of the loan (depending on the lender). It’s important to add up these costs and factor them into your decision, as they can add a substantial amount to the loan balance over time.
Complexity: Reverse mortgages can be complex financial products. Understanding the long-term implications, such as how the loan will affect your estate and the fees involved, is crucial. It’s highly recommended to seek independent financial and legal advice before proceeding.
What should I consider before taking out a reverse mortgage?
As with any credit product, you should assess the potential benefits and drawbacks of a reverse mortgage to see if it suits your needs and circumstances. Generally speaking, reverse mortgages are used for homeowners who have more assets than disposable cash or savings.
Before proceeding with a reverse mortgage, it's crucial to assess how it aligns with your financial goals and circumstances. It is important to consider whether taking out a reverse mortgage could affect your eligibility for the Australian Government’s Age Pension with its impact being dependant on how it is used.
According to Moneysmart, further consideration to make are whether any reverse mortgage payments could affect your ability to pay aged care costs, future living expenses, medical bills and home maintenance. It would also reduce the value of your estate when you pass away, as the loan would have to be paid out of any money you hope to pass on as inheritance.
It is also a good idea to talk to an independent financial adviser and obtaining legal advice before making any decision on or committing to a reverse mortgage.
How can we help with your reverse mortgage contract?
We have reviewed and advised many clients on their reverse mortgage. If you are looking at getting a reverse mortgage, get in touch with one of our experienced lawyers who can assist you discussing your legal obligations and considerations.
Disclaimer: Any advice on this page is general in nature and has not taken into account your objectives, financial situation or needs. Consider whether this general advice is right for your personal circumstances. You may need advice from a qualified adviser.
