What is a Reverse Mortgage?
Reverse mortgages let pensioners and retirees from the age of 60 convert the equity in their property into cash. No income is required to qualify but credit providers are required by the law to lend money responsibly, so not everyone will be able to access this type of loan.
Although interest is charged as with any other loans, you do not have to make repayments while you live in your house – the interest compounds over time and is added to your loan balance. You remain the owner of your house and even though you can make voluntary payments if you wish, you will only have to repay the loan in full when you sell the house, move to an aged care home, or die.
The Risks of a Reverse Mortgage
• Interest rates and fees are usually higher than standard home loans
• Your debt can rise quickly as a result of the interest compounding over the term of the loan
• It may affect your pension eligibility
• You may not have enough money for aged care or other future needs
• If you are the sole owner of a property and someone is living with you, that person may not be able to stay there when you die
• If you fix your interest rate, the costs to break your agreement can be very high
How Much Can You Borrow?
The amount you can borrow varies depending on the lender. Typically, the older you are, the greater the amount you can borrow.
If you are 60, the maximum amount you can borrow is likely to be 15–20% of the value of your house.
You can usually add 1% for each year past 60. As for the minimum amount you can borrow, it depends on the provider but can be as low as $10,000.
Keep in mind that if you borrow the maximum amount now, you may not have access to any more money later.
How Much Will a Reverse Mortgage Cost?
The cost of the loan depends on the interest rate and fees. As the interest compounds, the debt will grow quickly. It is critical to understand the potential costs, with ASIC providing a basic calculator to show how much your debt will increase over time and how will impact the equity in your home.
https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/reverse-mortgage-calculator
Be Aware of the Detail
A reverse mortgage can have a significant impact on your finances, relationships and the quality of your life upon retirement. It can be useful to relieve financial pressure or improve your lifestyle, however you need to be aware of the terms and conditions that come with the loan, as well as the choices available for you.
Speak with an Independent Finance Specialist
Understanding the pros, cons and long term impact of the reverse mortgage is critical to determining if it is suitable for your situation. To help work this out, your credit provider or independent finance specialist with MFAA Reverse Mortgage qualifications must go through the products and calculations with you using an approved reverse mortgage calculator. This will help illustrate the effect it will have on the equity in your home over time, and also show the impact of interest rates and house price movements.
To discuss your reverse mortgage options, contact me today to find out more.