You might have heard retirees referring to themselves as being “asset rich but cash poor”.This essentially means that while they have their own home, they could be struggling to make ends meet. Sometimes, even maintaining their home can become a financial burden.
Some retirees use reverse mortgages to gain access to an income stream. But, what is a reverse mortgage, and how do you pay back a reverse mortgage loan?
What is a reverse mortgage?
A reverse mortgage allows retirees to borrow money using their home as security. Based on the valuation of your home, you are allocated a particular amount as a loan, which you can withdraw in different ways. For example, you can take the money as a lump sum, a regular income stream, a line of credit, or even use a combination of the three.
What makes this loan tempting for retirees is that while you can remain the owner of the house and you don’t need to make repayments unless what’s called a “trigger event” occurs. This includes the death of the owner, the borrower leaving the property, or if you breach a clause.
It’s best to read the conditions carefully before you sign a reverse mortgage contract as it may contain a clause that requires you to maintain the property to a certain standard. Some retirees find this difficult in the longer term. .
What factors impact how much you need to pay back?
While you don’t need to make regular repayments for a reverse mortgage, you need to remember that the interest compounds. This means it gets added to the amount borrowed. This rapidly increases your debt over time, but the value of your property may increase as well. This can make it difficult to determine how much equity you actually have.
How do you pay your reverse mortgage back?
Your reverse mortgage is usually repaid when you die or move into aged care. However, sometimes if your family wants to keep the property, they can pay off the reverse mortgage and keep it. It depends on the arrangement you come to.