If you’re age 60 or over, own your own home and need to access money, a reverse mortgage is one way that you may be able to leverage the equity in your home to access extra cash.
Let’s look into the basics of what you need to know about a reverse mortgage when considering if this option is right for you.
What Is A Reverse Mortgage?
A reverse mortgage is a simple product that enables you to access the savings in your home, to draw on your home equity to afford the retirement lifestyle you desire without having to downsize and leave the home you love.
Designed for homeowners aged 60 and over, a reverse mortgage in Australia doesn’t require regular repayments, which means you’ll have more monthly cash available for covering lifestyle expenses, allow you to remain the owner of your home and benefit from all of its capital growth.
People may access a reverse mortgage in order to:
- top up their retirement income or set up a contingency fund
- Refinance a mortgage or consolidate debt
- Fund home repairs or renovations
- Cover medical or dental fees
- Gift family with a home deposit or education.
How a reverse mortgage works
You stay in your home and don’t have to make repayments while living there. Interest Payment for the use of money over time. The rate of interest can be fixed or variable. It is usually calculated as a percentage of the amount lent or borrowed. For example on a $10,000 car loan that has an interest rate of 10%, you would pay $1000 interest in the first year.
Interest charged on the loan compounds and the interest rate is likely to be higher than on a standard home loan.
You repay the reverse mortgage loan in full, including interest and fees, when:
- you sell your home
- you move out of your home, or
- your deceased estate sells your home
What does a reverse mortgage cost?
The cost of the reverse mortgage loan depends on:
- how much you borrow
- how you take the amount you borrow (for example, a lump sum will cost more due to compounding interest)
- the interest rate and fees (for example, loan establishment, ongoing fees, valuation)
- how long you have the loan
Over time, your debt will grow and your equity will decrease (see our case study below).
Features of a reverse mortgage
- You can stay in your home and won’t have to make repayments to your lender while you’re living there.
- Once you or your estate sells the property the reverse mortgage loan will need to be repaid to the lender in full.
- The interest charged on the loan will compound over time.
Reverse mortgages allow you to borrow more as you age. Each year, the proportion of your homes value that you can borrow increases. As a general example, if you’re 60 years old, you may only be able to borrow 15–20% of the value of your home. This might then be increased by 1% for each year over 60.
Depending on your age and lender policy, you can take the amount you borrow as a:
- regular income stream
- line of credit
- lump sum, or
- combination of these
The minimum you can borrow varies, but is typically about $10,000.
Considerations of a reverse mortgage
While you won’t need to make repayments when still living in your home, once the property used to secure the loan is sold, the reverse mortgage loan balance will need to be repaid in full, including interest and any ongoing fees.
Depending on your age, a reverse mortgage may also affect your eligibility for the Age Pension. It would also help to speak with a suitably qualified financial or tax adviser to understand the consequences for your personal circumstances.
Additionally, it’s worth thinking about anyone who lives with you and what their position will be if you pass away, considering your home is often your biggest asset to be left to others.
Negative equity protection
An important feature of reverse mortgages is negative equity protection.
The no negative equity guarantee means that you won’t end up owing the lender more than your home is worth if the value of the home you used to secure the loan falls below the value of your outstanding balance.
To give you a better idea of your borrowing ability and the impact a loan will have on your equity over time, you can use ASIC’s Moneysmart reverse mortgage calculator.
How else can I access the equity in my home?
A reverse mortgage is just one way of accessing the equity in your home. Depending on your financial and personal circumstances, alternative options such as loan increases or home reversion may be better suited and are worth considering for homeowners and borrowers at all life stages.
A reverse mortgage is not something all lenders will offer, but there are other ways to access the equity in your home which may be more suitable for your situation.
Loan increases
Another way to leverage your home equity is to borrow money through a home loan top up or increase. Speak with your mortgage broker about increasing your existing home loan limit to access the extra cash.
A home loan top up or increase is dependent on a number of factors. Firstly, check with your home loan broker if this option is available for your loan type.
You will also need to be in a position to make extra repayments, as by increasing the amount you owe on your home loan, your repayments will also increase.
Additionally, your lender may require a formal valuation to determine the current market value of your home. This is done in order to calculate how much usable equity is in your property. Get in touch with us if you’d like us to help you organise a property valuation for your home.
Home reversion
Home reversion is when you sell a proportion of the future equity in your home at a discount while continuing to live there in exchange for a lump sum payment.
The cost to you is the difference between what you get for the share of your home now and what that share may be worth in the future when you decide to sell.
This can be risky as costs are entirely dependent on the state of the housing market when the sale goes through which is challenging to predict. It’s really important to get independent advice on any future projections and understand the potential impact on your financial situation to weigh up whether this option is right for you.
Read more about home reversion here: https://moneysmart.gov.au/retirement-income/reverse-mortgage-and-home-equity-release
With a number of ways to access the equity in your home, it’s important to consider which option is best for your situation. A great way to do that is by speaking with a mortgage broker who has access to lots of different loan products from many different lenders.
Using a mortgage broker to guide you through this process will help to ensure you get unbiased advice and can consider your options from a raft of lenders, rather than just one. If you’ve never used a mortgage broker before, this article outlines the benefits of using a mortgage broker as opposed to going straight to your lender.
It’s really important to understand your options when it comes to reverse mortgages. It’s a great idea to seek independent advice before you go ahead and make sure you’ve done your own research.
Please get in touch with us today if you’d like to discuss your home equity options in more detail.
All lending subject to status and lenders criteria. Terms & conditions apply. This document contains general information only. Your own personal circumstances have not been considered and you should seek independent financial advice prior to making any decision on a financial product.
