Reverse Mortgages
May 29, 2020
Access money with the home you own.
A reverse mortgage or 'home equity release' may be an option giving you access to money now while staying in your home. It sounds great – but beware. There is risk involved, and a long-term financial impact, so weigh up the pros and cons carefully first.
There are generally two types arrangements:
Reverse Mortgage
A type of loan. The loan amount depends on your age, the value of the home and how it is taken (lump sum, regular payments or draw down as needed). Interest is added to the loan and compounds (you eventually pay interest on interest). The loan does not have to be repaid until the borrower moves out or the house is sold, usually as part of a deceased estate.
Home Reversion
Allows you to sell a proportion of the future value of your home while you live there. You get a lump sum, and keep the remaining proportion of your home equity. When you sell your home, you will only get the value of the share you own.
The amount of money you will receive depends on your age, the value of your home and the type of equity release.
Know Your Rights and Responsibilities
As with all options careful research is needed. These arrangements are complicated and involve lots of numbers and projections – ask lots of questions and don’t feel embarrassed if you are struggling to understand what is being offered.
Key questions to ask:
- Why do I need extra money? (If you need extra money to maintain your home, you might be better off moving to a lower maintenance property.)
- Have I thought through the long term implications of eroding the value of my home? What if I need to move into residential aged care? Can my partner or kids stay on if I die?
- What happens if interest rates change?
- What if I change my mind?
- Have I got a source of independent financial or legal advice before I go ahead?
Services
Australian Government Moneysmart Website
Independent information on understanding Reverse Mortgages including the questions you should be asking Reverse mortgages can be very complex and challenging to understand.
Pension Loans Scheme - Australian Government
Applicable only to home owners and mainly targeted to aged pensioners, a reverse mortgage can allow older people to borrow against the value of their home to increase their regular income. A scheme that lets older Australians get a voluntary non-taxable fortnightly loan advance to supplement your retirement income. You can choose the amount of loan you get fortnightly. This amount can be up to 1.5 times the maximum rate of the qualifying pension. You can stop loan payments at any time. The scheme isn't available for payment of lump sums. The loan, costs and interest will eventually need to be repaid, most likely from your estate. The interest rate is variable and was 5.25% in November 2019.
The Major Banks
The 4 large Australian Banks all offer reverse mortgage products Conditions vary but generally these loans are used to supplement income or provide a lump sum
Mortgage Brokers
Brokers often have access to a range of information and comparisons between providers. Lending Brokers are essentially selling loans so keep this in mind when you approach them for information.
