What’s a reverse mortgage?
A reverse mortgage is a loan generally available only to people over 60 years of age, allowing them to release and use funds based on the equity in their home.
This loan can be paid out to you as a lump sum, line of credit or as regular ongoing income payments. Just like a traditional mortgage, this loan will incur interest charges that are compounded over time.
Where a reverse mortgage differs is the way it is repaid. Payments are only due when the last surviving borrower leaves or sells the home, or once they pass away – no regular payments are required.
Is a reverse mortgage right for me?
A reverse mortgage may be a good option to help many people needing extra funds after retirement, allowing them to take care of debt, take a trip, fund ongoing medical needs, or live a more comfortable lifestyle. With the rising cost of living (including energy prices), unlocking the equity in your home can allow you to stay in your own home for longer, while still being able to meet the ongoing cash flow needs in retirement
The funds released could also be used to pay for aged care services or accommodation.
What are the risks?
There are risks associated with reverse mortgages that should be explored before considering this option. For example, interest rates on a reverse mortgage are often higher than traditional mortgages. Fortunately, with negative equity protection, the homeowner will not be held liable for any amount owed in excess of the value of the home.
Another risk that should be considered concerns any person who lives in the home that is not the property owner. In some cases, this person may not be able to stay in the home after the homeowner’s death.
It may also affect a person’s Age Pension eligibility. It’s important to get financial advice and explore all risks before taking on a reverse mortgage.
Estate planning considerations are also an important consideration as these types of arrangements can leave beneficiaries feeling deprived of what they otherwise could have received.
What can be borrowed?
Each lender has their own policy determining the amounts a person can borrow in a reverse mortgage. Generally, a 60-year-old is likely to be able to borrow 15-20% of the value of the home. This increases proportionally with a person’s age (above 60), by approximately 1% per year.
There may be minimum amounts a person is required to borrow, based on the rules of the lender. However, it may be a good idea to take only what is necessary, as this can allow access to more money later if needed.