What are they?
As the name suggests, Reverse Mortgages are a standard mortgage, but in reverse. With a standard mortgage you make regular repayments and eventually the loan gets paid off. With a reverse mortgage, there is no requirement for you to make any regular payments to the loan. The lender simply adds on (capitalizes) the interest and other fees to the loan.
As at December 2013 there would approximately 40,000 reverse mortgages worth $3.6bn outstanding*. The average reverse mortgage is $86,000*.
How they work?
Reverse mortgages are a method of accessing the equity in your property, without having to show that you can service the loan ie make loan repayments. Typically borrowers need to be 65 years old to access these products. At this age they can access 20-25% of the equity in their property. As the age of the borrower at time of application increases, the percentage of the property value that can be accessed increases. The highest percentage is typically 45% at age 85 or above. Different lenders have different limits.
The reverse mortgage funds can be accessed in various ways.
- Lump sum – in this case the whole of the loan maybe drawn down at settlement of the loan. Typically accounts for 94% of reverse mortgages*
- Regular payments – the loan can be set so that each month a set amount of money is drawn from the loan and paid to the borrower. Around 6% of reverse mortgages*
- Combination – a lump sum maybe drawn initially and then regular payments taken thereafter.
Whilst there is no requirement to make repayments into the loan, it is possible to do so.
If no repayments are made to the loan and the interest is capitalised onto the loan, over time the size of the loan increases. The consequence is a possible reduction of equity in the property, particularly if capital growth of the property value does not keep pace with the increasing loan balance.
At it’s extreme, the value of the outstanding loan and accrued interest and fees may be equal to or more than the value of the property. This has obvious consequences for the value of the estate.
It is now a requirement with reverse mortgage lenders that they have a “ NO negative equity” guarantee on their reverse mortgage. This means that even if the value of the outstanding loans and fees is greater than the value of the property when it is eventually sold, the lender does not have access to other assets of the estate.
Typically the repayment of a reverse mortgage is triggered when
- The youngest borrower dies
- The borrowers permanently move out of the property into say aged care.
- The borrowers move out of the property permanently for some other reason
- The property is not well maintained and the value of the property decrease.
With either of these options, the full value of the reverse mortgage plus accumulated interest and fees must be repaid to the lender.
Things to consider
Before embarking on a reverse mortgage, you may want to consider the following;
- Are there other options that you can choose to access the funds you require?
- Have you consulted with the beneficiaries of your estate re how it will affect their possible inheritance?
- Are you comfortable with the possible reduction in the equity you have in your property and having a mortgage on your property?
- Will a reverse mortgage affect your Centrelink entitlements?
- You may want to access independent financial advice prior to taking a reverse mortgage.
What can you do with a reverse mortgage?
Most lenders will typically say the funds can be used for “any worthwhile purpose”. According to Deloitte’s reverse mortgage survey from December 2013 the top three uses are;
- Income -this would include other items such travel and buying a car
- Debt repayment – people sometimes carry a home loan or other debt into retirement and want to pay it off to free up cashflow.
- Home Improvements – accessing funds to pay for a new kitchen. Bathroom extension etc.
Not all lenders will consider a reverse mortgage in all locations. Before you proceed to far please contact us (link) to see if a reverse mortgage is available.
* Deloitte reverse mortgage survey December 2013.
Please read our Reverse Mortgage Information Statement
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