If you are approaching or in retirement you may be looking at ways to fund your lifestyle without having to rely on anyone. One way of doing this is by harnessing the equity in your home to take out a reverse mortgage.
What is a reverse mortgage?
A reverse mortgage is when you use the equity in your home as security against a loan that you take out with a bank or lender. The loan allows you to remain the owner of your house and to live in it for as long as you like.
You have the option of making this loan a lump sum payment, a line of credit, a regular income payment or a combination of these formats.
Interest is charged on the loan however you are not required to make repayments as long as you live in your house. The interest instead compounds and is added to the loan balance.
The loan must be paid in full once you either sell your home, move into aged care or die.
What are the risks?
As with all financial products there are some risks to be aware of before you commit to taking out a loan. These are some things to keep in mind when considering whether to take out a reverse mortgage:
- Interest rates will often be higher than other home loans on the market
- Beware of compounding interest on the loan as it can make the total debt amount rise quickly
- Taking out a loan could affect your ability to claim the aged pension in the future
- If you are the owner of the property and live with another person they might not be able to stay in the property once you die
It is important therefore to research the reverse mortgage you wish to take out beforehand. Consider if you need to claim the aged pension or have another person living in your house and ask as many questions as you can of your potential provider before settling on the right loan for you.
What are the benefits?
Even though there are risks involved there are pros that can make a reverse mortgage a great option for some people. Benefits can include:
- An extra income that won’t come at the expense of you giving up your home
- No regular repayments required until you no longer live in your home, although voluntary repayments can often be made
- Legislation ensures that you can’t borrow more than the value of your house which helps ensure you won’t be leaving your family in debt
What else should I be aware of?
By law, your loan provider must give you a reverse mortgage information statement before you take out the loan. Take your time to read this document and understand the conditions of your loan.
ASIC also warns against lenders who offer you an income stream in return for the capital growth on your property. These loans often result in the borrower getting smaller repayments than the capital appreciation the lender is getting. They are also not likely to be covered by financial legislation meaning you will not be protected under normal customer protection laws.