Reverse mortgages: Your top questions answered

As Australian seniors consider their options for retirement income, reverse mortgages are becoming an increasingly popular choice.

A reverse mortgage is a loan that allows you to borrow money against the equity in your home, with the loan only repaid when the home is sold or the borrower passes away. While this may sound like an attractive option for those who need extra cash, it’s important to understand how reverse mortgages work and how they may affect your pension.

That being said, Starts at 60 spoke to “The King” of loan financing, BlueRock Finance’s Managing Director, Jamie King. With his wealth of knowledge and extensive background in commercial banking and mortgage broking, Jamie is fully equipped to help those over 60 better understand reverse mortgages.

How does a reverse mortgage work in Australia?

According to King, a reverse mortgage can be an attractive option for over 60’s as it gives you the financial freedom to release some equity from your home without having to sell.

“You can continue to enjoy your community and the comforts of living in your home for as long as you choose,” he said.

“You’ll remain the owner of your home, benefitting from any potential increase in property value and there’s no requirement to make any loan repayment until the end of the loan, usually this happens when you sell the house, move into long-term care or pass away.”

In Australia, reverse mortgages are offered by a variety of lenders, including banks, credit unions, and specialist mortgage providers. To be eligible for a reverse mortgage, you must be over the age of 60 and own your home outright, or have a significant amount of equity in your home.

The amount you can borrow with a reverse mortgage will depend on a number of factors, including your age, the value of your home, and the equity you have in your home. Typically, the older you are and the more equity you have in your home, the more you can borrow.

As mentioned by King, one of the key features of a reverse mortgage is that you don’t have to make any repayments on the loan while you are living in your home. Instead, the interest is added to the loan balance each month, which means that the amount you owe will continue to grow over time.

When you sell your home or pass away, the loan balance must be repaid. This is typically done by selling the home, with any remaining equity left over after the repayment, going to you or your heirs.

However, if the sale of the home does not cover the full amount of the loan, the lender may be able to pursue other assets to recover the remaining balance.

Does a reverse mortgage affect your age pension?

One of the most common questions about reverse mortgages is how they might impact your pension. The good news is that a reverse mortgage will not affect your eligibility for Age Pension or other government benefits.

However, the money received from a reverse mortgage may be considered an asset for means testing purposes. This means that if you receive a lump sum payment from a reverse mortgage, the amount of this payment may be included in the calculation of your assets for the purposes of determining your eligibility for certain government benefits.

It’s also worth noting that taking out a reverse mortgage may impact your ability to access other types of credit in the future, such as personal loans or credit cards. Lenders may view a reverse mortgage as a debt, which could affect your creditworthiness.

It’s important to note that there are different types of reverse mortgages available in Australia, including lump sum and line of credit options. With a lump sum option, the borrower receives a one-time payment, while with a line of credit option, the borrower can draw down on the loan as needed.

Another important factor to consider when taking out a reverse mortgage is the fees and costs involved. These can vary widely depending on the lender and may include application fees, valuation fees, legal fees, and ongoing fees. It’s important to carefully review these costs and understand how they will impact the total amount you owe over the life of the loan.

Before taking out a reverse mortgage, it’s also a good idea to seek independent financial advice. A financial advisor can help you understand the pros and cons of this type of loan, and how it may impact your overall retirement strategy.

King recommends contacting Centrelink to discuss your individual circumstances when applying for a reverse mortgage.

Are reverse mortgages a good idea for retirees?

Reverse mortgages can be a good option for retirees who own their homes and need additional income. They’re particularly useful if you don’t have a significant amount of savings or other assets but have built up equity in your home over the years. The money borrowed can be used to supplement a retirement income, pay for medical expenses, or make home improvements.

King says a reverse mortgage is a good idea for retirees in the following circumstances:

• Don’t have plans on moving soon: You should plan on remaining in your home for the near future if you’re considering a reverse mortgage. This rule of thumb isn’t unique to reverse mortgages; it also usually doesn’t make sense to get a new forward mortgage (like a refinance loan) on a home you’re about to sell.
• Have a spouse who is 60 or older: Any borrower on a reverse mortgage must be at least 60 years old. If you’re married and your spouse isn’t yet 60, getting a reverse mortgage is not ideal. It’s also important to note that some providers will allow it if your spouse is 55 years or older.
• Can meet the financial and physical demands of home ownership: Keeping up with your property taxes, homeowners insurance, and home maintenance is essential if you have a reverse mortgage. If you fall behind, the lender can declare your loan due and payable.
• Their home is just an asset: Some homes have sentimental value. If your home has been in the family for decades or generations, your children might hope to keep it that way.

However, it’s also important to carefully consider the potential drawbacks of a reverse mortgage.

Interest rates on a reverse mortgage can be higher than traditional mortgages, especially with the interest being added to the loan balance each month, which can quickly eat away at the equity in your home. Additionally, reverse mortgages typically have higher fees and closing costs than traditional mortgages.

As previously mentioned, another factor to consider is that a reverse mortgage may impact your ability to leave your home to your heirs. When the home is sold to repay the loan, any remaining equity will go to the beneficiaries, rather than to your heirs. This means that if you were planning to leave your home as an inheritance, a reverse mortgage may not be the best option.

It’s also worth noting that taking out a reverse mortgage may impact your ability to access other types of credit in the future, such as personal loans or credit cards. Lenders may view a reverse mortgage as a debt, which could affect your creditworthiness.

Alternatives to a reverse mortgage

If you’re not fully sold on getting a reserve mortgage, but still want to save money or get extra income, the good news is there are other alternatives you can do to reach your goals.

• Downsizing: Selling your current home and buying a smaller, less expensive property can help release equity without taking on new debt. This can also reduce maintenance costs and other expenses associated with homeownership.
• Home equity release: You can consider a home equity release product, such as a home reversion scheme or a lifetime mortgage. These products allow you to access some of the equity in your home without having to make repayments. However, it’s important to carefully consider the terms and conditions of these products and seek independent financial advice.
• Selling other assets: If you have other assets, such as stocks or property, you may be able to sell them to release equity.
• Government assistance: You may be eligible for government assistance programs, such as the Pension Loans Scheme or the Commonwealth Seniors Health Card. These programs can provide you with additional income and support without taking on new debt.

Whether you choose to get a reverse mortgage or opt for one of the alternatives, with any financial decision, it’s important to do your research, seek advice from experts, and carefully consider all of your options.

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.

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.