Reverse mortgages are typically used to supplement retirement income by allowing retirees to borrow a percentage of their home’s value. Most lenders offer reverse mortgages only to people over 55 years of age who are title-holding homeowners. Further, the borrowing limit for a reverse mortgage can also depend on the borrower’s age and change as you age.
For instance, a 60-year-old borrower may apply for a reverse mortgage where the amount doesn’t exceed 20 per cent of their home’s value. A 70-year old, on the other hand, could access up to 25 per cent of their home’s worth or home equity.
If you’re wondering how much you can borrow on a reverse mortgage, you may want to use a reverse mortgage calculator to work this out. The Australian Securities and Investments Commission (ASIC) requires lenders to use their reverse mortgage calculator - hosted on the MoneySmart website - when discussing with potential borrowers the amount they can borrow and the amount they’ll need to repay.
Why is using a reverse mortgage calculator necessary?
Australian lenders need to follow ASIC’s guidelines and use a reverse mortgage calculator as part of their responsible lending obligations. As a borrower, you can take advantage of the calculator to better understand how taking out a reverse mortgage will impact your financial circumstances. The calculator can give you a sense of the amount you can borrow from different lenders in terms of the lender’s loan-to-value ratio (LVR) and upper borrowing limit. For instance, some lenders may offer a reverse mortgage of up to 20 per cent LVR, which means applicants could borrow as much as 20 per cent of their home’s worth, but only up to a maximum of $500,000.
The details you’ll need to input into the reverse mortgage calculator include your details and your home’s value. Lenders will assume the value of your home will increase by 3 per cent per year. How you drawdown the funds will also be factored into the calculation. You can choose a single lump-sum payment or an income stream. To finalise the calculation, you or the lender will need to input the costs of a reverse mortgage, such as interest rate, administration charges, and any recurring operating fees.
ASIC’s reverse mortgage calculator is designed to check if borrowers are receiving pension loan payments or Centrelink payments. In the latter case, borrowers may need to inform Centrelink before applying for a reverse mortgage. Also, lenders should use the reverse mortgage calculator to help borrowers gauge the financial impact of applying for a reverse mortgage.
As per ASIC, lenders must give borrowers information about the following scenarios:
- How much their debt can increase over time, and how this affects the equity in their home
- How their equity will be affected if their home’s value doesn’t change over time
- How their equity will be affected if the lender charges a 2 per cent higher interest rate
The calculator gauges what the borrower could owe the lender at different durations and the resulting change in their homeownership based on this information. For instance, a borrower may withdraw 40 per cent of the equity in their home with a reverse mortgage over ten years, leaving 60 per cent of the home’s value still available as equity.
How is reverse mortgage interest calculated?
The default interest rate for reverse mortgages, as set by ASIC, is 7 per cent. Lenders may choose to charge an annual percentage rate (APR); however, they must discuss with customers the impact of this interest rate rising by as much as 2 per cent. As a borrower, you need to remember that the reverse mortgage calculator assumes that the interest rate doesn’t change over the loan duration. In reality, lenders may charge a variable interest rate.