What You Should Know About Reverse Mortgage Lenders and Loans
A reverse mortgage (not to be confused with a 'refinance')is a very advanced loan product for Australians over the age of 60. Unlike other home loans, this product can have a direct impact on your personal finances and quality of life during retirement.
For these reasons alone it is very important that anyone thinking about getting a reverse mortgage knows the full ins and outs on how they work.
This article will tell you:
- How a reverse mortgage works
- Risked associated with a reverse mortgage
- Advantages of opting for a reverse mortgage
- How much you can borrow
- Negative equity protection
- Fees and costs that come with such a product
At the end of this article you will have a solid understanding of reverse mortgages and whether they are for you.
How does a reverse mortgage work?
In a nutshell, a reverse mortgage allows you to borrow money using the equity tied up in your home, leaving your home as collateral. The money you receive from a reverse mortgage can be taken out in:
- A lump sum
- Line of credit
- A regular payment (weekly, monthly, bi-monthly etc) or;
- Combination of the three
In Australia there are ‘no requirements’ needed to apply for a reverse mortgage although lenders by law are required to lend money responsibly. If your finances are in order you will not face too much trouble applying for a reverse mortgage.
Interest is charged to a reverse mortgage much like any other home loan, the only difference is you are not requirement to make any repayments while you occupy your home. Interest on reverse mortgages are compounded over the period of your loan.
The loan must be repaid back in full including interest and fees when:
- You sell your home
- Pass away or;
- Move into a care home
The risks with a reverse mortgage
All loans carry with them some level of risk and we always advise doing a bit of due diligence before locking yourself up to any home loan product. Reverse mortgages do have their risks, they include:
- Higher interest rates – expect to pay higher interest rates on a reverse mortgage than most regular home loans.
- Debt rises quickly – as the loan is compounded you debt rises a lot quicker than most people account for.
- Pension – your pension may be affected if you decide to take out a reverse mortgage.
- Future problems – when it comes time to sell your property you may not have funds to look after yourself in the later years of your life. However, some lenders will allow you to protect a portion of your home to cater for this.
- Break costs – ending a reverse mortgage can be very expensive.
The advantages of a reverse mortgage
These types of products are not without their advantages, here are some of the reasons older Australians opt for reverse mortgages:
- Flexibility – reverse mortgages are very flexible and can be used in a number of different ways. You can tailor the loan to help you pay off a number of other debts easily, or to enjoy the final years of life.
- Live at home – one of the upsides to taking out a reverse mortgage is the fact there are no monthly mortgage repayments while you stay in your home.
The money you have left can be used anyway you see fit.However, you will still be required to pay your home insurance and any taxes that relate to your home.
- Risk of default is minimal – since you are not required to pay any of the loan back until you leave your home, the likelihood of default is extremely low.
- Still keep homeownership – during your agreement with the lender, the home is still under your name even though you have leveraged some of your home’s equity.
How much can you typically borrow?
Generally speaking, the older you are the more lenders are willing to give - reverse mortgage are rarely taken out by first home buyers or investment beginners.
Just like regular home loans each lender’s amount will vary based on their risk appetite. As a general rule of thumb in Australia, if you are aged 60 you can borrow anywhere between 15-20% of your home’s value. For every year above 60 add around 1% extra.
For example, a 75 year old can borrow approximately 30-35% of their home’s value.The minimum amount you can borrow will vary from lender to lender and is sometimes as little as $10,000. Do keep in mind that if you borrow the maximum amount now, you cannot borrow more later.
What are the fees?
Fees of a reverse mortgage depend on the interest rate and fees listed by your lender. The biggest issue with fees is the compounded interest which grows quickly if you fail to manage your money well.
Some products allow you to protect a portion of your home’s worth, for example, if your home is worth $850,000 you can protect $225,000 of the value that can be used later for a care home or hostel. This usually increases the fees and interest of your loan.
Negative equity protection
As of September 18th, 2012, borrowers who take out a reverse mortgage cannot end up owing their lender more than the value of their home. When your home is sold the lender will receive all proceedings of the sale and you are not liable to pay anything extra.
The only circumstances you can expect to pay more is due to fraud or misrepresentation.If you have taken out a reverse mortgage before 2012 and don’t know where you stand, refer back to the contract you signed with the lender or seek legal advice.
The bottom line
As we mentioned at the beginning of this article, a reverse mortgage is a very complex product that needs to be fully understood by the borrower in order to reduce risks and plan for retirement appropriately.
Every lender must hand you what is known as a reverse mortgage information document.
This will state how their loan product works, a breakdown of costs, what you need to think about before taking out a reverse mortgage and people to contact for further information. If you are over 60, living in Australia and looking to leverage some of the equity in your home for a brighter retirement, feel free to contact us today for any questions you may have.
We are more than happy to give you free impartial advice on what the best option will be based on your own personal circumstance. For more information on reverse mortgages and other advance loan strategies such as business loans, visit our homepage and call/email us today!