What to look for in a reverse mortgage
While reverse mortgages are being touted as the answer to a cash-strapped, home-owning retiree's prayers, there are always potential pitfalls to consider.
Read Reverse mortgages explained and then consider the following issues to ensure you understand how reverse mortgages work and what to look for when shopping for this type of loan:
In summary, the general requirements are:
– Usually, borrowers must be at least 60 years old
– Borrowers can generally borrow between 10 to 45 per cent of the value of their home, depending on age
– The interest charged is around 1 per cent higher than a standard variable home loan rate
Drawing on the loan and repayment
Under a reverse mortgage, while borrowers can receive the principal as an upfront lump sum, you can also choose to receive the principal in the form of regular part-payments from the lender over time.
You do not have to make any repayments – either principal or interest – to the lender during the term of the loan, although you do have the option of doing so if you wish. Instead, the entire loan, including accrued interest and any additional fees and charges, falls due on your death or when you move out of the mortgaged home permanently.
The lender then recovers the loan by either having the beneficiaries of the your estate pay the debt, or by enforcing its mortgage and selling the home. In most cases, the lender will give your beneficiaries up to six months to repay the debt. If the lender sells the property, they will give any funds left over to your estate. Check these conditions on any loan you consider for suitability to your circumstances.
One such consideration is the possibility you may lose your own home if property prices fall sharply and there is a sizeable debt built up from borrowings.
While this is an unlikely occurrence, for peace of mind, consider taking out a reverse mortgage that is a ‘non-recourse loan'. A non-recourse loan gives a ‘no-negative-equity guarantee' which prevents the mortgage provider from stepping in and taking your home away from you. That is, you will not become homeless if you end up owing more on the loan than the property is worth.
In the UK during the 1980s, thousands of retirees who took out such loans were evicted from their homes after rising interest rates and falling property prices saw the loan amount exceed the value of their homes. Most of the providers in Australia do offer a non-recourse loan, although at least two: the Police and Nurses Credit Society and StateWest Credit Society do not.
Some of Australia's providers of reverse mortgages have formed a not-for-profit body to oversee a voluntary code of conduct that is aimed at establishing safeguards for people that take out such loans.
The Seniors Australian Equity Release Association of Lenders (SEQUAL) has compiled a 10-point code of conduct designed to ensure that anyone seeking a reverse mortgage is provided with clear explanations of what these loan products comprise and all their likely implications.
As part of the membership, members have to ensure that their products have negative equity protection for consumers. This means that any scheme that has been endorsed by SEQUAL will provide protection from any further liability in the event that your loan balance exceeds the net realisable value of your property.
Published: 20 September 2005