If you’re one of many cash-poor but asset-rich homeowners in Australia looking to free up some extra funds, a reverse mortgage is one way you can do so.
The average age of borrowers taking out a reverse mortgage is 75, so many Aussies are turning to reverse mortgages to pay for their retirement.
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 lender. It’s one way that asset-rich Aussies can pay for the things they want without having to sell their home.
According to ASIC’s MoneySmart website:
A reverse mortgage is a type of home loan that allows you to borrow money using the equity in your home as security. The loan can be taken as a lump sum, a regular income stream, a line of credit or a combination of these options.
Interest is charged like any other loan, except you don’t have to make repayments while you live in your home – the interest compounds over time and is added to your loan balance. You remain the owner of your house and can stay in it for as long as you want.
What are the pros and cons of a reverse mortgage?
This loan type allows you to access extra income that won’t force you to give up your home by selling it outright. Also, as of 18 September 2012, negative equity protection was put in place to prevent borrowers from owing more than their home is worth. You also do not need to make regular payments until you no longer live in your home.
However, it is important that consumers understand the risks associated with this type of lending. Interest rates are often higher than other home loan products on the market, and compound interest on the loan can make the total amount of debt accumulate quickly.
While regular payments are not immediately required, you must repay the loan in full when you sell your home or move into aged care or die. Also, taking out a reverse mortgage can affect your pension eligibility, and in some circumstances if you are the sole owner of the property and someone lives with you, they may not be able to stay in the home when you die.
- Access equity easily without selling your home
- Negative equity protection
- Higher than average interest rates
- Compound interest grows debt faster
- Can impact pension eligibility
Who takes out a reverse mortgage?
According to a report on reverse mortgages by Deloitte, in 2015 there were 40,000 reverse mortgages with an average loan size of $92,000. It was estimated that more than $500 billion in home equity is held by Australians aged over 65, and reverse mortgage loans make up $3.66 billion as at the end of 2014.
The Deloitte report also found that most reverse mortgage customers are couples (47 per cent) followed by single females (36 per cent). These customers’ average age is 70-79 (49 per cent) and the average age of new borrowers is 75 years.
As most home owners have fully paid off their homes and are retired by 75, it makes sense that this would be one option to help fund some of their retirement dreams. However, there are rules around how much you can borrow against your home.
According to ASIC’s MoneySmart:
As a general guide, if you are 60 the maximum amount you can borrow is likely to be 15-20 per cent of the value of your home. You can usually add 1 per cent for each year older than 60. That means if you are 70, the maximum amount you could borrow would be about 25-30 per cent.
The minimum amount you can borrow may depend on the provider. It could be as low as $10,000. Keep in mind that if you borrow the maximum amount now, you may not have access to any more money later.
Should I use a reverse mortgage to fund my retirement?
A reverse mortgage is one way you can free up some funds for anything from a holiday, to helping your children pay for their first home deposit. It should not be the only thing you use to fund your retirement due to the higher than average home loan fees and the minimum percentage of your home equity you can take a loan against.
If you’re considering the future and planning on using a reverse mortgage to fund your retirement, you may be better off making regular, extra payments into your superannuation. Many Aussies don’t want to sell their homes to fund their retirement. In this instance, making extra contributions to your superannuation balance before tax (salary sacrificing) and after tax, will ensure you’re covered for the future.