If you own your home but require extra money for whatever reason, taking out a reverse mortgage could be one option to consider. RateCity investigates.
April 27, 2010
A reverse mortgage is when a borrower uses the equity in their home as security to borrow money. They have the choice of receiving this money either as a lump sum, as a line of credit, as a regular income or a combination of these options.
One of the major advantages of a reverse mortgages is that they are generally structured in such a way that the borrower can never owe more than the value of their home. The amount you can borrow depends on your age, which determines what percentage of the value of your home you will receive. Usually you can get between 15 and 45 percent of the value of your home, but the longer you’ve had the loan the more equity you will have to use.
No repayments but interest builds
While you live in your home, you are not required to make any repayments; you only repay the loan in full if you either sell, if you move into an aged-care facility or if you should pass on. Depending on which occurs first, you or the lender will sell your home, pay off the loan with the money received from the sale then any left over money goes to you or your estate.
To work out exactly how much a reverse mortgage will cost you at the end of the term is difficult. The interest is compounded over time but the final figure depends on the principal, the term of the loan, the structure of the loan, interest rates, fees and charges and more. Some lenders allow you to protect a fixed percentage of the value of your home which guarantees that you will have some money left over if your home is sold.
Get the most out of your reverse mortgage
There are some myths when it comes to reverse mortgages, so here are some tips to ensure that you get the most out of your loan:
Interest rates for reverse mortgages are usually slightly higher than standard home loan rates. For example RateCity’s best rate for a reverse mortgage is 6.85 percent compared to the top variable home loan rate at 6.15 percent.
Opt for a reverse mortgage with no negative equity guarantee which ensures that you do not have to pay more than the value of your home. These guarantees usually come with terms and conditions, so check with your lender before agreeing to the terms.
Keep in mind that the value of your property is also likely to change over this period. As your property increases in value and you increase in age, you will be able to take out more equity.
Read all the small print before signing any contract and consult your lender with any queries you have.