What is a reverse mortgage and are you eligible?

What is a reverse mortgage and are you eligible?

If you’ve crossed the age of 60 and are looking for a way to get some extra cash for retirement, you may be able use a reverse mortgage to access the equity that is tied up in your home. A reverse mortgage allows older Australians to borrow money using their home as security for a loan. If you’re eligible for a reverse mortgage, you can choose to receive the loan amount in regular payments that can help you during your retirement or as a lump sum if you need to make a large payment. 

However, a reverse mortgage does come with certain risks and can affect your eligibility for other benefits, like the Age Pension. So, if you’re planning to apply for a reverse mortgage, you should gather as much information as possible to make an informed decision. Depending on your situation, you may also need financial and legal advice. 

How does reverse mortgage work? 

A reverse mortgage allows people over 60 to borrow a certain proportion of their property’s value, which is repaid when the borrower has sold the house, moved into aged care or died. The borrower is charged interest on the amount they are loaned, which compounds. This means that the amount that needs to be repaid will continue to increase as the interest builds up, even if you don’t borrow additional funds. 

Sometimes reverse mortgages are used to pay for daily expenses, bills and debts, home improvements and car expenses. 

What are the risks of a reverse mortgage? 

While a reverse mortgage may cover your immediate expenses, you need to be aware of the long-term risks of the loan. Some of the risks involved include: 

  • The interest rate and fees for a reverse mortgage are often higher than standard home loans, which means your debt can rise quickly over the term of the loan. 
  • If you’re living with someone else, that person may not be able to continue to stay in the house after you die. 
  • The cost to repay the loan or to break the agreement is usually very high, especially if you choose a fixed interest rate. 

How to qualify for a reverse mortgage 

The age requirement to get a reverse mortgage for most lenders is at least 60-65 years. To be eligible for a reverse mortgage, your home loan should be paid off. 

Usually, there is no specific income eligibility for reverse mortgages; however, most lenders will follow responsible lending requirements. For example, you can only borrow a proportion of your home’s value. As a rule of thumb, people aged 60 can generally borrow no more than about 15-20 per cent of the value of their property. 

Other factors to consider

If you’re looking at applying for a reverse mortgage, you should consider multiple factors before making a decision. Some of the things that you should consider while applying for a reverse mortgage include: 

Future expenses 

Before applying for a reverse mortgage, first, think about your future needs and how the loan could impact your ability to afford them. 

Eligibility for pension

This type of loan could have an impact on your pension entitlement. It’s worth consulting with the Department of Human Services’ Financial Information Service about the impact of the loan before making any decisions. 

Think about the other implications

There could be some clauses in the fine print of your agreement that carry risks that are not immediately clear to you. So, ask your legal adviser to explain the details and clauses of the reverse mortgage agreement. This will help you get a complete understanding of the terms and conditions and possible risks.

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What do people do with a Macquarie Bank reverse?

There are a number of ways people use a Macquarie Bank reverse mortgage. Below are some reasons borrowers tend to release their home’s equity via a reverse mortgage:

  • To top up superannuation or pension income to pay for monthly bills;
  • To consolidate and repay high-interest debt like credit cards or personal loans;
  • To fund renovations, repairs or upgrades to their home
  • To help your children or grandkids through financial difficulties. 

While there are no limitations on how you can use a Macquarie reverse mortgage loan, a reverse mortgage is not right for all borrowers. Reverse mortgages compound the interest, which means you end up paying interest on your interest. They can also affect your entitlement to things like the pension It’s important to think carefully, read up and speak with your family before you apply for a reverse mortgage.

What should you consider when applying for a reverse mortgage from Bankwest?

If you’re looking at applying for a Bankwest reverse mortgage, it’s important to understand how the loan works and may affect your future.

Reverse mortgages are used by some seniors to pay for expenses like medical costs and home maintenance. Bankwest offers reverse mortgages to eligible customers as a lump sum, income stream, line of credit or a combination. It’s important to keep in mind you’ll likely be charged interest on the borrowed amount often at a higher rate compared to a regular mortgage.

The interest compounds over the years and the fees also get added to the loan amount. Over a period, the amount owed to the lender increases and the longer you hold the loan, the more you’ll have to repay. The entire loan amount is repaid when you move out, sell the home or pass away. R

everse mortgages can also affect your pension entitlements, so it’s critical to know what you’re getting into before you take one out. You can read more about getting a Bankwest reverse mortgage here.

How is interest charged on a reverse mortgage from IMB Bank?

An IMB Bank reverse mortgage allows you to borrow against your home equity. You can draw down the loan amount as a lump sum, regular income stream, line of credit or a combination. The interest can either be fixed or variable. To understand the current rates, you can check the lender’s website.

No repayments are required as long as you live in the home. If you sell it or move to a senior living facility, the loan must be repaid in full. In some cases, this can also happen after you have died. Generally, the interest rates for reverse mortgages are higher than regular mortgage loans.

The interest is added to the loan amount and it is compounded. It means you’ll pay interest on the interest you accrue. Therefore, the longer you have the loan, the higher is the interest and the amount you’ll have to repay.

How to use the ME Bank reverse mortgage calculator?

You can access the equity in your home to help you fund your needs during your senior years. A ME Bank reverse mortgage allows you to tap into the equity you’ve built up in your home while you continue living in your house. You can also use the funds to pay for your move to a retirement home and repay the loan when you sell the property.

Generally, if you’re 60 years old, you can borrow up to 15 per cent of the property value. If you are older than 75 years, the amount you can access increases to up to 30 per cent. You can use a reverse mortgage calculator to know how much you can borrow.

To take out a ME Bank reverse mortgage, you’ll need to provide information like your age, type of property – house or an apartment, postcode, and the estimated market value of the property. The loan to value ratio (LVR) is calculated based on your age and the property’s value.

How much can I borrow with an ING reverse mortgage?

When you apply for an ING reverse mortgage, the loan amount depends on your home’s value and your age. Generally, as you grow older, the loan-to-value ratio (LVR) increases. Usually, 60-year old homeowners can borrow up to 20 per cent of the property value. In contrast, borrowers 70 years or older can borrow up to 30 per cent of the home’s value. The maximum LVR is limited to 45 per cent giving you an additional buffer if you require money in the future.

The government regulations impose certain limits on how much you can borrow against your home’s equity. The borrowed amount can’t exceed your home’s value, and you can only borrow a certain percentage of your property’s value.

Why does Westpac charge an early termination fee for home loans?

The Westpac home loan early termination fee or break cost is applicable if you have a fixed rate home loan and repay part of or the whole outstanding amount before the fixed period ends. If you’re switching between products before the fixed period ends, you’ll pay a switching break cost and an administrative fee. 

The Westpac home loan early termination fee may not apply if you repay an amount below the prepayment threshold. The prepayment threshold is the amount Westpac allows you to repay during the fixed period outside your regular repayments.

Westpac charges this fee because when you take out a home loan, the bank borrows the funds with wholesale rates available to banks and lenders. Westpac will then work out your interest rate based on you making regular repayments for a fixed period. If you repay before this period ends, the lender may incur a loss if there is any change in the wholesale rate of interest.

Remaining loan term

The length of time it will take to pay off your current home loan, based on the currently-entered mortgage balance, monthly repayment and interest rate.

What are the responsibilities of a mortgage broker?

Mortgage brokers act as the go-between for borrowers looking for a home loan and the lenders offering the loan. They offer personalised advice to help borrowers choose the right home loan for their needs.

In Australia, mortgage brokers are required by law to carry an Australian Credit License (ACL) if they offer credit assistance services. Which is the legal term for guidance regarding the different kinds of credit offered by lenders, including home loan mortgages. They may not need this license if they are working for an aggregator, for instance, as a franchisee. In both these situations, they need to comply with the regulations laid down by the Australian Securities and Investments Commission (ASIC).

These regulations, which are stipulated by Australian legislation, require mortgage brokers to comply with what are called “responsible lending” and “best interest” obligations. Responsible lending obligations mean brokers have to suggest “suitable” home loans. This means loans that you can easily qualify for,  actually meet your needs, and don’t prove unnecessarily challenging for you.

Starting 1 January 2021, mortgage brokers must comply with best interest obligations in addition to responsible lending obligations. These require mortgage brokers to act in the best interest of their customers and also requires them to prioritise their customers’ interests over their own. For instance, a mortgage broker may not recommend a lender who gives them a commission if that lender’s home loan offer does not benefit that particular customer.

Which mortgage is the best for me?

The best mortgage to suit your needs will vary depending on your individual circumstances. If you want to be mortgage free as soon as possible, consider taking out a mortgage with a shorter term, such as 25 years as opposed to 30 years, and make the highest possible mortgage repayments. You might also want to consider a loan with an offset facility to help reduce costs. Investors, on the other hand, might have different objectives so the choice of loan will differ.

Whether you decide on a fixed or variable interest rate will depend on your own preference for stability in repayment amounts, and flexibility when it comes to features.

If you do not have a deposit or will not be in a financial position to make large repayments right away you may wish to consider asking a parent to be a guarantor or looking at interest only loans. Again, which one of these options suits you best is reliant on many factors and you should seek professional advice if you are unsure which mortgage will suit you best.

How does a mortgage calculator work?

A mortgage calculator is an extremely helpful tool when planning to take out a home loan and working out the costs. Although each mortgage calculator you come across may be slightly different, most will help you estimate how much your repayments will be. The calculator will often also show you the difference in repayments if you repay weekly, monthly or fortnightly. 

To calculate these figures, you’ll be asked to enter a few details. These include the amount you plan to borrow, whether you’re an owner-occupier or an investor, the proposed interest rate and the home loan term. It will also often show you the total interest you’ll be charged and the total amount you’ll repay over the life of the loan.  

Understanding how the mortgage calculator works, helps you to use it to see how different loan amounts, interest rates and terms affect your repayments. This can then help you choose a home loan that you can repay comfortably and save on interest costs. The mortgage calculator lets you compare the benefits and costs of home loans from different lenders to help you make a more informed choice. Use a mortgage calculator to help identify which home loan is most suitable for your requirements and financial situation.

What happens to your mortgage when you die?

There is no hard and fast answer to what will happen to your mortgage when you die as it is largely dependent on what you have set out in your mortgage agreement, your will (if you have one), other assets you may have and if you have insurance. If you have co-signed the mortgage with another person that person will become responsible for the remaining debt when you die.

If the mortgage is in your name only the house will be sold by the bank to cover the remaining debt and your nominated air will receive the remaining sum if there is a difference. If there is a turn in the market and the sale of your house won’t cover the remaining debt the case may go to court and the difference may have to be covered by the sale of other assets.  

If you have a life insurance policy your family may be able to use some of the lump sum payment from this to pay down the remaining mortgage debt. Alternatively, your lender may provide some form of mortgage protection that could assist your family in making repayments following your passing.

What is mortgage stress?

Mortgage stress is when you don’t have enough income to comfortably meet your monthly mortgage repayments and maintain your lifestyle. Many experts believe that mortgage stress starts when you are spending 30 per cent or more of your pre-tax income on mortgage repayments.

Mortgage stress can lead to people defaulting on their loans which can have serious long term repercussions.

The best way to avoid mortgage stress is to include at least a 2 – 3 per cent buffer in your estimated monthly repayments. If you could still make your monthly repayments comfortably at a rate of up to 8 or 9 per cent then you should be in good position to meet your obligations. If you think that a rate rise would leave you at a risk of defaulting on your loan, consider borrowing less money.

If you do find yourself in mortgage stress, talk to your bank about ways to potentially reduce your mortgage burden. Contacting a financial counsellor can also be a good idea. You can locate a free counselling service in your state by calling the national hotline: 1800 007 007 or visiting www.financialcounsellingaustralia.org.au.

How to break up with your mortgage broker

If you find a mortgage broker giving you generic advice or trying to sell you a competitive offer from an unsuitable lender, you might be better off  breaking up with the mortgage broker and consulting someone else. Breaking up with a mortgage broker can be done over the phone, or via email. You can also raise a complaint, either with the broker’s aggregator or with the Australian Financial Complaints Authority as necessary.

As licensed industry professionals, mortgage brokers have the responsibility of giving you accurate advice so that you know what to expect when you apply for a home loan. You may have approached the mortgage broker, for instance, because you have questions about the terms of a home loan a lender offered you. 

You should remember that mortgage brokers are obliged by law to act in your best interests and as part of complying with The Australian Securities and Investments Commission’s (ASIC) regulations. If you feel you didn’t get the right advice from the mortgage broker, or that you lost money as a result of accepting the broker’s suggestions regarding a lender or home loan offer, you can file a complaint with the ASIC and seek compensation. 

When you first speak to a mortgage broker, consider asking them about their Lender Panel, which is the list of lenders they usually recommend and who may pay them a commission. This information can help you decide if the advice they give you has anything to do with the remuneration they may receive from one or more lenders.

How do I calculate monthly mortgage repayments?

Work out your mortgage repayments using a home loan calculator that takes into account your deposit size, property value and interest rate. This is divided by the loan term you choose (for example, there are 360 months in a 30-year mortgage) to determine the monthly repayments over this time frame.

Over the course of your loan, your monthly repayment amount will be affected by changes to your interest rate, plus any circumstances where you opt to pay interest-only for a period of time, instead of principal and interest.