Flexible uses for money
Can be used for any worthwhile purpose
Flexible uses for money
A great way to access the equity that's in your house
A reverse mortgage option for over 65's in the Perth area with a competitive variable interest rate
Specialist reverse mortgage
As the name implies, a reverse mortgage is the opposite of a traditional mortgage.
With a traditional mortgage, the borrower gets a loan so they can buy a home. With a reverse mortgage, the borrower ‘pulls out’ money from a home they already own.
Interest rates are usually higher for reverse mortgages than traditional mortgages.
The lender will agree an amount you can lend based on your age and your property value. You then don’t have to make any repayments until the property is sold (often after you die) or another means of repayment exists.
Interest is added to the loan every month, so it will steadily grow until the property is sold, when the whole amount will need to be repaid.
This cannot happen. In Australia, lenders have to give you a ‘no negative equity guarantee’, which means that whatever happens to interest rates or the value of your property, neither you or your estate can owe more than the value of the property.
Also, lenders can’t force reverse mortgage borrowers out of their home or close on their loan, which is an important protection for Australians taking out a reverse mortgage.
It is unlikely that this would happen anyway as banks strictly limit how much money a borrower can draw out of the mortgage, based on their age and the value of their home. In the unlikely event that the debt exceeds the sale proceeds, the bank will be forced to wear the loss.
|Traditional mortgage||Reverse mortgage|
|Typical borrower||Younger Australian||Older Australian|
|Loan balance||Decreases over time||Increases over time|
|Owner’s equity||Increases over time||Decreases over time|
|Loan closes||After 30 years||When the borrower dies or sells|
You can take out a reverse mortgage if you’re an older Australian and you own your own home.
Different banks adopt different policies, but as a general rule you won’t be able to take out a reverse mortgage until you’re at least 60.
The older you are, the more you can borrow. At 60, you might be able to borrow a sum equivalent to about 15 per cent of the value of your home. Generally, your borrowing capacity rises by 1 percentage point each year. For example, a bank might set the following limits:
Older Australians use reverse mortgages to finance a range of things, including:
Reverse mortgages might suit some older Australians who are asset rich but cash poor - that is, those are wealthy on paper (because their home is worth a lot of money), but who struggle to pay the bills (because they have to live on a small pension). A reverse mortgage might allow them to translate their paper wealth into real money, by cashing in some of their equity.
They can also suit Australians whose superannuation is performing well, so they decide to draw it down more slowly.
There are three ways you can take out a reverse mortgage:
Whichever option you choose, you will be asked to do three things:
The lender might also require you to get independent legal advice and/or independent financial advice.
Depending on the lender, you might be asked to choose from one of four options for collecting the loan:
While Australia has more than 150 lenders that offer traditional home loans, fewer than 10 offer reverse mortgages.
Unfortunately, this means your options are limited. But on the positive side, it makes it easier to research your options and choose the best reverse mortgage for your situation.
Here are some things to consider when comparing reverse mortgages:
Reverse mortgage case study
When Mrs Smith turns 80, she decides to take out a reverse mortgage on her $1 million home. It comes with a $495 establishment fee but $0 in ongoing fees. Over the next 10 years, she draws out $2,500 per month, at an interest rate of 6.25 per cent, but declines to make repayments.
By the time Mrs Smith dies, aged 90, she has accumulated about $416,000 of debt. At the same time, the value of her home has increased to about $1.3 million. The bank sells her home for that very price, thereby recouping its money. The rest of the sale proceeds (about $900,000) is retained by Mrs Smith’s estate.
For more information, see the screenshot below, which was taken from the ASIC reverse mortgage calculator.
The main advantage of a reverse mortgage is that you can turn your paper wealth into real cash. Cashing in your equity can free up money that you can then use to fund your aged care, maintain your home, pay for day-to-day living or whatever else takes your fancy.
Another advantage of a reverse mortgage is that the bank can’t kick you out of your home while you’re alive - even if it was worried about the size of the debt. That’s one reason why banks place strict limits on how much equity younger Australians can draw out of their homes (while allowing more leeway to older Australians).
A third big plus with reverse mortgages is that you don’t have to pay back any of the debt - at least while you’re alive. Instead, you can leave that problem to your estate. In this scenario, after you died, your estate would sell your home, use the sale proceeds to pay off the loan and then distribute whatever remained. And if the debt turned out to be larger than the sale proceeds, this loss would have to be borne by the bank, rather than the estate. This is called the ‘no negative equity guarantee’.
But reverse mortgages also have cons. For example, while reverse mortgage holders can’t be evicted from their homes, the bank might be able to evict any other residents (such as relatives) when the reverse mortgage holder dies.
Another problem is that your debt can greatly compound - the longer you live after taking out the reverse mortgage, and the fewer repayments you make, the larger the outstanding loan will become. This will reduce the amount of money you can leave to your heirs.
One potentially significant disadvantage is that a reverse mortgage may affect your pension eligibility. In other words, if you take out a reverse mortgage, you might find that you are no longer able to claim the pension.
How to protect your pension
It's advisable to check with Centrelink before taking out a reverse mortgage. That way, you can be clear on how a reverse mortgage might affect your pension eligibility, and what steps you need to take to protect it.
Reverse mortgages come with three main risks:
One big risk with taking out a reverse mortgage is that it could make you ineligible for the pension. That’s why you should strongly consider taking out independent financial advice before going ahead with the loan. You should also strongly consider talking to Centrelink. (If the reverse mortgage is structured correctly, you should be able to protect your pension.)
Another risk with a reverse mortgage is ‘going too early’. Usually, you only get one chance to pull out equity from your home, so if you take out a reverse mortgage while you’re still relatively young and healthy, you might find there is no equity left to cash in once you’re old and sick and really need the money.
Just as there’s a risk of going too early, there’s also a risk of going too hard. Someone who spends money on non-essentials like holidays or presents might find they don’t have enough money in the future when they get hit by big medical bills.
How to compare reverse mortgages
Here are six ways to compare reverse mortgage loans:
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