Reverse Mortgages are loans that allow home owners to borrow money using the equity in a home as security to help cover essential expenses such as home repairs or maintenance or even for personal use such as a new car or holiday.
Some institutions do place restrictions on what the released funds can be used for. Reverse Mortgages can also be known as Equity Release Loans.
Reverse Mortgages were heavily promoted by banks and lending institutions, but currently only a limited number of institutions offer these loans. The Commonwealth Bank offers an Equity Unlock Loan for Seniors, however the ANZ and Bank of Queensland no longer issue Reverse Mortgages.
Given the nature of this type of loan, it is important that homeowners understand the risks involved and protect themselves as much as possible and consider if they really do need to use an Equity Release loan. Loans can also be organised through an accredited broker/advisor who is a member of the Senior Australians Equity Release Association of Lenders (SEQAL).
How Do Reverse Mortgages Work?
Generally, no income is required to qualify for a reverse mortgage, making them ideal for those who have retired. However, interest is charged like any other loan and because no repayments are made, the interest compounds and is added to the loan balance. Loans can be drawn down as a lump sum or as a regular income stream or as a combination of these options.
Gearing is normally quite low and is limited by the age of the borrower, (the older the borrower the more that can be borrowed). However, there are a number of important points to consider as this type of loan is unlike a normal home mortgage:
- If the value of the house declines, the percentage of equity in the home at risk is higher.
- Fees both initial and ongoing (such as valuation reports).
- Interest rates may be higher than a normal home loan.
- Interest compounds and the debt can rise quickly.
- The debt will affect the inheritance left to the estate of the borrower.
- Funds remaining when a house is eventually sold may not be sufficient for future aged care needs.
- Understand the liability – without a 'No Negative Equity' guaranteee an end result may be a loan worth more than the value of the home (see the SEQAL website for more information).
- Understand the conditions – rights of repayment, what happens when a spouse dies etc.
Centrelink - an alternative to a Reverse Mortgage could be a Pension Loan Scheme – check Centrelink’s website for further details.
ASIC – Have an informative guide “Thinking of using the equity in your home”
Info Choice - Reverse mortgage comparisons
Canstar Cannex - Reverse mortgage comparisons
National Information Centre on Retirement Investments (NICRI) - information, a calculator and a downloadable booklet