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Reverse mortgages: the rules

Reverse mortgages the rules

May 12, 2011

The reverse mortgage industry in Australia is worth $3 billion. Popular with cash-poor, asset-rich homeowners over 60, they are usually used to free up funds in retirement.

The money can be dispensed by your lender as a single payment, regular income, line of credit or a combination of the two. Lenders will usually approve a loan of 15 to 40 percent of the value of your home, but it’s generally wise not to borrow 100 percent of the funds available to you as you may not have enough money left over to cover future costs such as aged care or unexpected illness.

You also need to check with Centrelink to see if and how the extra money will affect your pension payments.

The interest is usually higher than on other loans and incurs compound interest, which is deferred to the existing loan and does not have to be repaid until the property is sold or the homeowner dies.

Reverse mortgages have come under scrutiny in recent years for their ability to leave borrowers in negative equity. For this reason, the federal government introduced stricter legislation earlier this year banning reverse mortgages, which allow negative equity to accumulate. The new laws also include tougher information disclosure requirements to ensure people understand their obligations, and also require borrowers to have higher levels of capital.

The new legislation makes reverse mortgages less profitable and has resulted in a decline in the number available, with some lenders withdrawing this type of mortgage altogether. Since the mid-90s, the popularity of reverse mortgages increased by 77 percent per year, but that figure has recently slowed to just nine percent.

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