What is a reverse mortgage?
If you’re looking to make your retirement more comfortable, then a reverse mortgage could help you to access some of the value in your home, for income right now.
What is a reverse mortgage?
A reverse mortgage is a loan that you take out which is based on the equity in your property. Your equity is the value of the property, minus any mortgage owed on it. For example, if your home is worth $700,000 and you have an outstanding mortgage of $55,000, your equity is $645,000.
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Is this just for older people? What is the age limit on a reverse mortgage?
Yes, it is for older people. The age minimum for a reverse mortgage is 60; if you’re a couple, the youngest person must be at least 60and you must have some equity in the property.
Lenders may have their own age limits for particular borrowers.
How does a reverse mortgage work?
Your bank will lend you money based on and secured against this equity, kn own as a home equity loan. The amount that you can access is based on the amount of equity you have and your age.
Once you’ve had your reverse mortgage loan approved, you’ll be able to access the money and use it as you wish.
You can choose to have your money as a regular income payment or a lump sum deposit into a bank account.
Your lender will apply interest to the amount, but crucially, you don’t have to make any repayments. The interest is added to the loan balance each month and it’s paid either when you sell the property or die.
If you take the mortgage and the reverse mortgage out as a couple then this payment will happen when the surviving partner dies, sells or moves into a care facility.
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How is the loan paid to us?
You can take the loan either as a lump sum, a regular monthly payment to boost your income or as a line of credit to use as and when you need. You can also take it as a combination of all three.
What proportion of my equity can I take out?
The older you are, the more you can take out. This is because, quite bluntly, you have fewer years left for the interest to pile up. Lenders want to be sure that the remaining equity in your property will be enough to cover the loan plus interest when the property is sold.
Most reverse mortgages offer between 15 per cent and 45 per cent, depending on your age, with 60–year–olds being able to access 15 per cent and people aged 85 and over being eligible for up to 45 per cent.
Things to bear in mind
A reverse mortgage is a product aimed at older people and it has a direct effect on the biggest asset that they own and that they may be planning to leave to their children. It needs careful consideration and independent financial advice before any moves are made. Here are the main considerations.
There are higher interest rates
The interest rates on reverse mortgages are sometimes twice as high as those on regular mortgages. When you compare reverse mortgages, you have to look closely at the interest rates as once the loan is in place and the interest starts to compound, it can rise steeply.
There are setup fees
Generally, setup fees range from $1,500 to $2,000 to cover application fees, government and legal charges, as well as broker fees.
Your pension eligibility
Taking a reverse mortgage can affect how you qualify for your pension. You’ll need to contact Centrelink at the Department of Human Services to find out more and to see if you can structure the loan so it has the minimum impact on your pension.
Potential break fees
If you have a fixed interest rate on your reverse mortgage, refinancing or breaking the agreement can involve high fees.
Avoid borrowing too much
Only borrow what you really need so that your interest payments are kept to the minimum. Look at the current value of your property, as well as the projected value over the period of the loan and talk to a financial adviser to get an idea of how much interest you’ll be likely to pay.
What are the alternatives to a reverse mortgage?
You could sell your current property and downsize to a smaller place, but you’ll have to pay stamp duty, conveyancing fees and agent commission, which might eat into your profits. You could consider an equity release, especially if you’re at the younger end of the scale.
What is equity release?
An equity release is also a loan, but unlike the reverse mortgage, you will make monthly repayments on the loan. You’ll be eligible for an equity release if you have enough monthly income to service the loan for the term.
Which reverse mortgages have low interest rates?
Right now, in November 2019, G&C Mutual Bank’s Retiree’s Access Home Loan has an interest rate of 5.62 per cent p.a. (comparison rate 5.65 per cent p.a.). However, the interest rate alone isn’t the be–all and end–all. When it comes to looking for reverse mortgages in Australia in 2019, you need to look at other features as well.
The G&C Mutual offer only allows for a lump sum, whereas the Heartland reverse mortgage can be taken as a lump sum or as regular payments. Having the equity released in portions like this reduces the overall interest burden and so if you’re looking to increase your income during retirement, this facility might be more cost-effective for you.
Compare reverse mortgages at InfoChoice today.
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