Thinking about a reverse mortgage? Here’s what you need to know
A reverse mortgage is a financial product that lets senior homeowners release some of the equity tied up in their property.
Reverse mortgage fast facts:
- You must be aged at least 60
- You must have significant equity in your property
- Some lenders will lend you a certain amount of money based on this equity, and
- The loan will be repaid when you either sell the property or die
How does a reverse mortgage work?
A reverse mortgage releases some of the equity you have in your property. Your equity is the value of the property you own minus any outstanding mortgage. If you’re over the age of 60 you may be able to convert some of this equity into liquid funds.
The amount of equity you could release depends on how old you are and how much the property is worth.
If you’re approved for a reverse mortgage then you don’t have to make any payments – the interest is added to the mortgage balance each month.
How do I repay the reverse mortgage?
You don’t have to repay the mortgage until you sell the property, until the last surviving borrower dies (for joint mortgages), or when you move into an aged care home.
Is the money in one lump sum?
Not necessarily. With some mortgages, you can receive the money as a lump sum, as a line of credit or as a monthly payment.
How much of the equity can I borrow?
Most reverse mortgage lenders will let you borrow between 15 and 45 per cent of your property’s value. The older you are, the more you can borrow as there’s less time for the interest to grow. Lenders want to avoid a scenario in which the sale of the property doesn’t cover the cost of the loan and its interest.
Some lenders have an age scale, with borrowers between 60 and 65 years of age being able to access 15 per cent of their property value and people over 80 being able to borrow up to 45 per cent.
Other factors include the value of the property, as well as an estimate of how much the value will grow in the future. Very often, lenders assume a wrong value of three per cent per year, although this can always vary.
Is there anything I need to be cautious about with a reverse mortgage?
These products are designed for older people and they do affect the value of their home, which may be their biggest asset. There’s nothing intrinsically wrong with a reverse mortgage, but as with any financial product, you need to look at any potential downsides.
Higher interest rates
Reverse mortgages typically have higher interest rates than regular home loans. At the moment, most reverse mortgages have interest rates between five and six per cent p.a. which is twice the average rate for typical home loans. Once the interest starts compounding, the loan balance can grow very quickly.
Set–up fees can be costly
The fees to set up a reverse mortgage can be quite high, typically between $1,500 and $2,000. The fees you can expect to pay include broker fees, an application fee, governmental charges and legal fees.
Your pension eligibility could be affected
A reverse mortgage can affect your eligibility for your pension so you should contact the Department of Human Services to see if and how you can avoid this.
You might face expensive break fees
If your reverse mortgage has fixed rate interest, then breaking the agreement can result in large fees.
To avoid large interest charges, you should borrow the minimum amount that you need so that your loan balance doesn’t grow too rapidly and become worrisome.
What are the alternatives to a reverse mortgage?
If you want to release some equity from your property but you don’t think a reverse mortgage is right for you, then you do have alternatives. The most popular alternative is to sell up and downsize to a smaller or cheaper property. While this could free up a lot of money, remember that you’ll have stamp duty, conveyancing and legal fees and moving costs. If these costs are smaller than the potential interest you’ll accrue on your reverse mortgage, then downsizing may be a better option.
InfoChoice’s pick of reverse mortgages for July
The Household Capital Household Loan allows homeowners to release up to 50 per cent of their property value (at the age of 90). The variable rate mortgage has an interest rate of 5.15 per cent p.a. (comparison rate 5.21 per cent p.a.) and set–up costs of 1.5 per cent of the loan amount.
You can receive the loan as a lump sum or as regular payments, and you can also make partial repayments to control the accrual of interest.
The Heartlands Seniors Finance Reverse Mortgage allows homeowners to borrow up to 45 per cent of their property’s value (at the age of 90). The variable rate home loan has an interest rate of 5.80 per cent p.a. (comparison rate 5.82 per cent p.a.) and it’s also available on holiday homes and investment properties.
You can make partial repayments on this mortgage and the set–up fees are $495.
The G&C Mutual Bank Retirees Access Home Loan allows homeowners to borrow up to 40 per cent of their property’s value. It has a variable interest rate of 5.22 per cent p.a. (comparison rate 5.28 per cent p.a.) and the funds are available as a lump sum. There’s an establishment fee of $500 and making partial repayments is allowed.
Compare Seniors Finance and Reverse Mortgages at InfoChoice.