In Retirement Income on Monday 30th Aug, 2021

Reverse mortgages: Your 6 biggest questions answered

Aug 30, 2021
Reverse mortgages are safely and specifically designed to help over-60s live better at home. Source: Getty

A reverse mortgage could substantially boost your retirement finances by giving you a lump sum or regular extra cash flow. It’s also safer than other forms of equity release, because you automatically get a number of protections required by Australian law.

It is a financial contract, though, so it’s an important decision and there are definitely some big questions that you should ask to find out if a reverse mortgage could be the right choice for you.

Here are the most commonly asked questions:

  1. What is a reverse mortgage?
  2. What’s the difference between a reverse mortgage and a home equity loan?
  3. How can I benefit from a reverse mortgage?
  4. What can I use the money for?
  5. How am I protected from losing my home?
  6. When do I need to repay the loan?

Let’s go through each of these great questions.

1. In a nutshell, what’s a reverse mortgage?

A reverse mortgage lets you borrow against the value of your home without having to commit to a monthly repayment schedule for the principal and interest. As the name suggests, a reverse mortgage operates in the opposite way to a traditional home loan; meaning that you withdraw equity from your home to unlock the savings that have built up over time. These savings are a combination of your payments or repayments, plus capital growth.

The lender agrees to wait to be repaid both principal and interest at some time in the future, and takes a mortgage over your home as security. While most lenders allow you to make regular interest payments, it’s more common for people using a reverse mortgage to defer paying the interest. This means the interest will compound over time and you will pay more in the long-run, but it won’t reduce your monthly cash flow in the meantime.

In a nutshell, you get funds now, you may pay interest-only now, or you may pay nothing now, with the principal and interest repaid later.

2. What’s the difference between a reverse mortgage and a standard home-equity loan?

Both are forms of debt where you borrow against the value of a property, which is secured via a mortgage.

Only the reverse mortgage is designed for over-60s, and permits you to defer regular repayments until the end of the loan term, with a number of peace-of-mind protections. As reverse mortgages are designed for older Australians, the lender understands that you may no longer be in full-time work and may be reliant on the Age Pension. The lender also knows that consumer protections are important to you, especially those that preserve your right to continue to live in your own home and not fall into negative equity. In fact, these protections are enshrined in Australian law.

The standard owner-occupier home-equity loan requires you to commit to a monthly repayment schedule. There may also be differences in fees, interest rates and protections for both you and the lender. Importantly, if you’re unable to make repayments, your loan could default, and you may lose your home.

3. How can I benefit from a reverse mortgage?

One of the key benefits of a reverse mortgage is that you could be approved to borrow money when you are over 60 and are no longer earning any income.

Another benefit is that you could structure the loan to defer all repayments of principal and compound the interest. This means you can never fall into arrears.

In fact, you could access your home equity to help you stay living independently in your own home for as long as you want to. You have guaranteed occupancy and remain the owner, benefiting from any increase in your home’s market value.

Overview of benefits:

  • No need for regular repayments, leaving more cash available for meeting health and lifestyle objectives each month.
  • Improved funds gives you more options in your retirement.
  • Retaining ownership in your home means benefiting from 100% of its capital growth.
  • Peace of mind, as reverse mortgages are highly regulated, with strong consumer protections governed by Australia’s National Consumer Credit Protection (NCCP) laws.

4. What can I use the money for?

Let’s take the example of a Household Loan, a reverse mortgage offered by Household Capital, which provides you with choice and flexibility. For example, you don’t have to take all the money out at once; you can save on interest by accessing it over time, as you need it.

Here are some examples of what you could do with your home equity:

  • Renovate or modify your home to make it safer and more comfortable for retirement.
  • Choose your own in-home care service and tailor it to meet your needs.
  • Cover the costs of transitioning to residential aged care.
  • Pay for medical or dental expenses.
  • Create a contingency fund for unexpected expenses.
  • Refinance an existing home loan.
  • Buy a new car.
  • Make an eligible gift or loan to your children.
  • Pay education expenses for your grandchildren.

(Please note that if you use a reverse mortgage to access your wealth to help your children, there are Centrelink rules relating to the value of gifts and deeming provisions on loans. So we recommend that you carefully consider the impact of your choices on any Centrelink entitlements you may have.)

5. How am I protected from losing my home?

You can rest assured that you will not lose your home, even if times get tough. You can’t be forced to move out or sell, as long as you’ve met your obligations.

A reverse mortgage is a financial contract, and it will contain terms and conditions, such as the requirement for you to live in the property, pay the rates and keep it in good condition with appropriate insurances.

You may not be permitted to leave the home vacant for an extended period of time, though, and you need the lender’s permission to use your property to generate income from long-term or short-term rental arrangements.

Importantly, a reverse mortgage provides protections not available with other forms of equity release, such as the no negative equity guarantee. Negative equity means that the value of your liability (your debt) cannot be greater than the value of your asset (your home).

6. When do I need to repay the loan?

The loan must be repaid in full when you sell, or the last borrower permanently leaves your home. Repayment trigger events include:

  • Your home is sold. Repayment is required at settlement.
  • Up to five years from when the last borrower moves into aged care.
  • Within 365 days of when the last borrower passes away, or ceases to reside in the property.

Retirement boost

Reverse mortgages are not as complex as you may think. Importantly, accessing your home equity could contribute to a better retirement outcome.

HOUSEHOLD CAPITAL INFO Important information. Applications for credit are subject to eligibility and lending criteria. Fees and charges are payable, and terms and conditions apply (available upon request). Household Capital Pty Limited is a credit representative (512757) of Mortgage Direct Pty Limited ACN 075 721 434, Australian Credit Licence 391876. HOUSEHOLD CAPITAL™, the Star Device and Household Capital and the Star Device are trademarks of Household Capital Pty Ltd.
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.

EVERYTHING YOU WANT TO KNOW ABOUT REVERSE MORTGAGES

Now that you know more about reverse mortgages, how would you change your retirement if you could access additional income? Check out our easy-to-use calculator to see how much you could access.

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