Table of Contents
A reverse mortgage allows a homeowner to borrow money using the equity as security.
It is a type of home loan available to those in Australia aged 60 and over, and it assists people who have run low on savings and sources of income. In other words, a person who is asset rich, but cash poor.
Interest is charged on a reverse mortgage as it is for any loan, but the borrower is not required to make regular repayments. The debt plus any accrued interest and fees is repaid from the sale of the property, either when it is sold or when the last surviving borrower passes away.
How Does a Reverse Mortgage Work?
A person with a reverse mortgage remains in their home and does not make repayments. Interest is charged on the loan and the interest rate is typically higher than a standard home loan. The loan must be repaid in full, along with fees and interest, when the home is sold upon the person’s death.
Reverse mortgage lenders apply different criteria, but as a general rule, as a person gets older they are able to access a higher proportion of the equity in their home.
“There are fairly strict guidelines in terms of the loan to value ratio (LVR) that borrowers can release,” says Darren Moffatt, founder and managing director of Seniors First. “It’s all determined by age and linked to life expectancies.”
For example, a person over 60 may be able to access funds worth 15% or 20% of the total property value. As a guide, add 1% for every year past 60.
What Are the Pros?
Perhaps the biggest benefit of a reverse home mortgage is that it allows a person to remain in the home they love. There is no need to sell the house in order to release some cash.
It also comes with a negative equity guarantee, which means that even if a property decreases in value to the point that it is worth less than the loan (which is known as ‘negative equity’), the borrower will never owe the lender more than what the home is worth.
“Reverse mortgages are the most heavily regulated financial credit product in Australia. There are some very strong consumer protections enshrined in the regulation, one of which is a no negative equity guarantee,” says Moffatt.
To benefit from the guarantee, three conditions must be fulfilled. Council rates must be paid on time, the property must be insured and all necessary repairs must be made.
What Are the Cons?
A reverse mortgage can turn out to be costly if the wrong loan structure is chosen for your circumstances. Choose a lender carefully and weigh up the different alternatives they propose. A reverse mortgage is more complex than a standard home loan.
“Will you take out a lump sum or a cash reserve? You don’t want to needlessly incur more interest charges than you need to,” says Moffatt.
What to Consider Before you Apply
Moffatt encourages families to talk about the possible implications of a reverse mortgage. Moffatt has encountered a small minority of children who are more focused on the size of their inheritance than on the day-to-day financial needs of their parents.
“In our experience, grown adult children and beneficiaries are generally very supportive of parents using these loans,” says Moffatt. “But there have been cases where the children were not super happy with it. It’s better to put everything on the table before you embark on this kind of loan.”
There are also potential implications for the age pension to be mindful of.
“In most cases, borrowing funds through a reverse mortgage will not affect the age pension. It comes down to the use of the funds,” says Moffatt.
If the funds are used to gift money or make an investment, it may be assessable under the assets test and reduce the pension amount. Always check with Centrelink first.
How to Qualify for a Reverse Mortgage
The positive news is that the home equity that a borrower releases for cash is not considered as income by Centrelink. It is available to people over 60 who own their own home.
Other options
In addition to a reverse mortgage, there are a few different ways to tap the equity in your home:
- equity release agreement
- home sale proceeds sharing (home reversion)
- the Home Equity Access Scheme
Home Equity Release
An equity release agreement allows for a portion of the value of a home to be sold. The owner receives a lump sum or instalment payments while continuing to live in the home. Fees are paid on the portion that has been sold and the homeowner’s proportion of equity reduces over time, which covers the fees being paid.
Home sale proceeds sharing (home reversion)
Also known as a home reversion, this allows the owner to sell a ‘share’ or ‘transfer’ (in other words, a proportion) of the future value of the home while remaining there. A lump sum is paid to the owner, who keeps the remaining proportion of their home equity.
Home Equity Access Scheme
Formerly known as the Pension Loans Scheme, this is provided by the government through Services Australia and the Department of Veterans’ Affairs. Eligible older Australians can receive a voluntary non-taxable fortnightly loan, which can be used to supplement their retirement income.
Frequently Asked Questions (FAQs)
Is a reverse mortgage a good idea?
If the correct loan structure is obtained, a reverse mortgage provides a way of remaining in the family home instead of selling it to raise funds to live off. For many people, this is an enormous benefit. Others may prefer to downsize.
How much can I borrow on a reverse mortgage?
The amount that can be borrowed is linked to the borrower’s age. The most a 60-year-old could borrow is approximately 15–20% of the value of the property. As a guide, add 1% for each year over 60. o make an REGULAR repayments. The debt plus any accrued interest and fees is repaid from the sale of the property, either when it is sold or when the last surviving borrower passes away”
What are the fees on a reverse mortgage?
The fees associated with a reverse mortgage include a loan establishment fee, ongoing fees and a valuation fee.
What is the reverse mortgage interest rate?
The interest rate differs among lenders, but it is safe to say that the interest rate for a reverse mortgage is higher—around 2%—than it is for a standard home loan.
Who provides reverse mortgages?
There are only around six lenders in Australia who offer reverse mortgages.
Some people may prefer to deal with a broker, as they will explain the pros and cons of each lending arrangement.
“The borrower should consider not just the choice of lender, but the interest rate and the fee structure,” says Darren Moffatt, founder and managing director of Seniors First. “They also need to consider the credit policy of each lender. The postcode location will influence how much a lender is willing to consider as a loan.”
Do you have to pay off your mortgage entirely to get a reverse mortgage?
Generally, yes, you need to own your home before you can successfully apply for a reverse mortgage. Some lenders may still approve you for a reverse mortgage if you are still paying off the loan, but will insist you use the funds from the new loan to pay off the remaining debt.
