A reverse mortgage is a type of loan typically used by senior and retired borrowers who choose to borrow money against their home's equity. Typically you have to refinance your home loan to access the equity on your home, which means taking out a new full-length home loan. A reverse mortgage offers you access to the equity in your home even if you’ve repaid the loan in full.
Reverse mortgages can help retirees with reduced income to increase liquidity or acquire assets. You remain in your home and are not required to make any payments when you are there. The interest on your loan increases over time, so it grows larger and adds to the total amount you owe. When you or your deceased estate sell your property, you repay the loan in full, including interest and fees. It’s commonly used to help retirees with the finances needed to move into an assisted living facility. Once the move is complete, the property can be sold, and the mortgage can be repaid.
Though the process seems straightforward and applicable to everyone, it has specific rules. The loan amount maximum for a reverse mortgage depends on two prime factors: the borrower’s age and the present-day valuation of the property.
How much can you borrow?
As a general rule, age is the primary factor that determines your reverse mortgage maximum loan amount. 60-year-olds are likely to borrow about 15-20% of the property’s value; this is a loan-to-value ratio (LVR) of 15-20%. You can then typically add 1% for each year over 60, depending on the lender’s terms. At 65 years old, you’ll likely be able to borrow 25-30% or an LVR of 25-30%. 70-year-olds may be able to borrow about 30% of the property's value or a 30% LVR.
You need to keep these LVR requirements in mind when applying for a reverse mortgage. Younger borrowers tend to have lower LVRs limits compared to older borrowers. You may also find that different lenders accept different LVR ratios.
With a range of lenders offering reverse mortgages, each with their own LVR limits, you may find a maximum reverse mortgage amount of 50% LVR with the right lender. On the other end, you’ll find that there is a minimum loan amount of $ 10,000. But these are all set by the individual lenders.
What are the interest rates like on a reverse mortgage?
You should also consider the interest rate you’ll have to pay when determining your reverse mortgage maximum amount. You’re not obligated to make regular monthly repayments whilst living in the property, meaning your loan balance will rise rather than shrink as the interest accrues. If interest rates rise, the amount you owe can become higher still. In general, you can expect to pay a rate that is around 1% higher than conventional home loans.
The loan will increase as interest is added, and you don’t have to make repayments; you should be careful not to end up with negative equity, i.e. a mortgage amount higher than the home’s valuation. When your reverse mortgage contract expires and your home is sold, the lender will collect the sale proceeds to pay the balance of the mortgage. You’ll not be responsible for any debt over this amount, except in circumstances such as fraud or misrepresentation. You or your estate will receive any extra funds if your house sells for more than the sum you owe to the lender.
What additional fees are part of a reverse mortgage?
It would be helpful for you to speak with a financial planning expert or a mortgage broker to decide the maximum reverse mortgage amount that works for you. You also need to consider all the fees you’ll have to pay with a reverse mortgage, which a financial expert can explain. These fees can include the filing fee, settlement fee, and legal fee, which are all essential upfront costs. Any other annual, weekly, or fortnightly payments can be considered as ongoing fees. You will then have to account for any exit fees and break costs included in discharge fees.