Quick guide to reverse mortgages

While reverse mortgages can help retirees supplement their income during retirement, there are pros and cons with such loans so make sure you seek appropriate independent advice. Here's a quick guide to the advantages and disadvantages of this type of borrowing:

Pros

• Suit 'asset rich, cash poor' retirees as they can tap into their biggest asset to fund living expenses and a better lifestyle.
• Borrowers can continue to live in their own house until they die or move homes permanently.
• There is flexibility so that loan money can be taken as a lump sum or as regular instalment payments.
• There are no repayments required until you die or sell the home.
• You can generally access around 10 to 45 per cent of the value of your home.
• Most products have a 'no negative equity' guarantee which means you won't end up owing more than the value of the home or be rendered homeless if its value drops.
• Their increasing popularity means more providers are offering them so the market is becoming more competitive.

Cons

• The interest charged is about 1 per cent higher than a standard variable rate.
• You must be of retirement age to qualify for one, generally 60 to 65 years old.
• They may impact on the borrower's eligibility for Centrelink payments so you may lose some of your age pension entitlements.
• They reduce the value of the estate so there will be fewer assets left for your beneficiaries.
• They limit future options for how the value of the family home may otherwise be used.
• They are typically sold to older consumers who have been recognised as possibly more vulnerable.
• They are not covered by the Financial Services Reform Act. Responsibility for regulating their sale rests with the State governments, rather than with Federal Government - although they do fall within the consumer protection provisions of the Australian Securities and Investments Commission.
• There is the potential for unscrupulous and unqualified operators to move into selling these products as they are not tightly unregulated.