What is a reverse mortgage?

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A reverse mortgage is the opposite of a traditional home loan: the longer you have it, the bigger  it gets.

Say what?

According to the Australian Securities and Investments Commission, it’s “a complex product that can have a significant impact on your finances and relationships, and your quality of life in retirement” by allowing you to borrow money using the equity in your home as security.

One of the key words here is retirement – this option’s for the over 60 year olds only. 

So how does it work?

A reverse mortgage can be paid as a lump sum, a regular stream of income, a line of credit or a combination of these options.

Interest is charged like any other loan, except you don’t have to make repayments while you live in your home.

The interest compounds over time and is added to your loan balance, explains Paul Francis, Heritage Bank General Manager Retail Services.

You don’t have to make repayments while you live in your home.

“A valuation will be conducted on your property to determine how much it is worth and the amount you can borrow is based on this and the age of the youngest borrower,” Francis says.

You remain the owner of your home and can stay in it for as long as you want.

“You must repay the loan in full, including interest and fees, when you sell your home or die or, in most cases, if you move into aged care,” says Mortgage Choice spokewoman Jessica Darnbrough .

Who does it suit?

Usually retirees or people about to retire are ideal applicants.

“A person who retires with a great deal of asset-based wealth, particularly their home, but little cash will have difficulty financing any lifestyle,” says mortgage broker Aaron Sainsbury from Smartline.

“These loans are used to convert the value of the home into ready cash, which the borrower can use to fund their retirement lifestyle.”

Darnbrough agrees reverse mortgage products “tend to best suit seniors who are looking for money to supplement their pension or any income they may be making in retirement”.

Reverse mortgage products tend to suit seniors

looking for money to supplement their pension.

Generally, this type of loan is only available to home owners above 60 years of age – though some banks prefer to lend to those over 65.

“To be eligible for a reverse mortgage, the seniors need to own their property although it isn’t usually a problem if there is still a small balance remaining on the original home loan,” Darnbrough says.

What costs are involved?

Budget between $1500 and $2000 to set up a reverse mortgage, Francis says.

Ongoing fees vary by lender but range from $0 to $15 per month.

Ongoing fees vary by lender but range from $0 to $15 per month.

Interest rates are usually 1-2% higher than a standard mortgage because no regular repayments are required.

Current reverse mortgage interest rates are between 7% and 8.5%, Darnbrough says.

There may be impacts on a homeowner’s pension eligibility.

Other important stuff

Sainsbury says reverse mortgages court “some controversy”, as they are pitched at borrowers who are approaching or already in retirement.

“This often stirs an emotional response,” he says.

Statutory negative equity protection was introduced on all new reverse mortgages in 2012.

This ensures you cannot end up owing the lender more than the market value of your home and your estate does not inherit a debt when you die.

Like any financial product, it is wise to obtain financial advice before you go ahead. Many lenders will insist on this, as well as legal advice.

Finally, your credit provider must give you a “reverse mortgage information statement” before any contracts are signed, according to ASIC.

Pros

  • Debt is capped at the value of your home.
  • Helps mortgage-free/cash-poor homeowners fund retirement.
  • Options include a regular payment, line of credit or lump sum.
  • Can enable homeowners to stay in their own homes.
  • You can always sell your home and pay out the debt.

Cons

  • Higher interest rates apply.
  • Interest starts accumulating from day one.
  • If you are sole owner, any cohabitants may have to vacant when you die.
  • The more you borrow now, and the younger you are, the less equity you will have in your home in the future, Francis says.

Source: www.realestate.com.au

Category: Credit

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