For elderly Australians who own a home but don’t have much cash in savings, a reverse mortgage can become a source of income and help fund their retirement. However, before you jump in, you need to also consider the interest payable on a reverse mortgage along with the principal or loan amount. Most lenders won’t ask for repayments whilst you’re still living in your property, but they will want the loan repaid if you die. This will leave it in the hands of your beneficiaries to sort out how the debt is repaid. If anyone is living in the property, they may need to move out.
Due to ASIC regulations, lenders only offer reverse mortgages worth up to 25 per cent of a property’s value with the expectation of selling the property to recover the loan if the owner dies. Given this scenario, you should consider the impact of your death upon those living in the property with you when taking out a reverse mortgage, as they may have to move out.
What do lenders usually do about reverse mortgages after the borrower dies?
When you take out a reverse mortgage, you’re borrowing a certain amount of money against your home’s equity. While your loan may only be for a percentage of your home’s value, your property is still used as security for the loan. This means that the lender can repossess and sell your home if the loan is not repaid. Since you have to be over 60 years old to take out a reverse mortgage, your death is often the trigger for lenders to seek repayment for the loan. Lenders need to ensure that you’re fully aware of the conditions of your reverse mortgage before you sign the contract.
Unless you’ve made arrangements through your will or estate planning, anyone living with you at the time of your death could need to vacate the house before it’s sold. Dealing with a reverse mortgage when the homeowner dies can add to your family’s pain and grief, which is why you should discuss it with your lender before borrowing the money. For instance, you could check if the lender accepts other forms of security, such as an investment property, instead of your residence. You should also consider the total repayment due on the reverse mortgage, which includes the compounded interest over various periods.
How to deal with a reverse mortgage after the borrower’s death
Ideally, you should appoint an executor for your estate who can take responsibility for dealing with your debts. This may be a more acceptable alternative for your family rather than them having to deal with a lender when grieving. The executor can decide whether selling the home is necessary or if there’s enough cash available in the estate to repay the reverse mortgage. For instance, if you took out a life insurance policy, the payout could settle the debt. Alternatively, suppose you left the property to your spouse, child, or another family member. In that case, they can check if they can assume legal responsibility for the reverse mortgage.
If you die without leaving any will or other arrangements for settling your debts, your heirs may not be able to take over the loan. They’d need to speak to the lender and discuss the reverse mortgage’s terms before deciding on a suitable course of action. For example, some reverse mortgages include an agreement that allows the surviving family members to continue living in the property as long as they can repay the loan completely. However, this option may only be available to people who aren’t potential beneficiaries and thus not obligated to repay the loan.