Aug 22, 2017 11:00:00 AM

All You Need to Know About Reverse Mortgages

Topics: Property Investment, Refinancing, Home Loan Rates 0

Reverse mortgages are still a relative unknown in Australia, making up just $2.8 billion of the total $1,494 billion in residential lending. But for many retirees, reverse mortgages offer a solution to the “asset rich, cash poor” problem, providing a way to live comfortably in retirement without having to sell off the family home. Read on to find out what you need to know about reverse mortgages before deciding if this is the right option for you.

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What is a reverse mortgage?

A reverse mortgage lets retirees tap into their home’s equity by freeing up a percentage of its value – either as a lump sum or drip fed each month. Loans are usually structured so that interest is added onto the loan, and the principal and interest repayments only need to be repaid when the loan is terminated – when the home owner moves out, sells or dies. 

While these types of mortgages are growing in popularity overseas, here in Australia, they’re in the minority. According to data released by the Australian Prudential Regulation Authority, in March 2017 only 28,000 households had reverse mortgages, up from 20,000 in March 2008. Average loan size has grown however, from $63,000 in 2008 to $100,000 in 2017.

The interest charged on a reverse mortgage is generally 2 percentage points higher than the market rate for a normal home loan, and only four institutions currently offer reverse mortgages: Commonwealth Bank, Bank West, P&N Bank and Heartland.

The risks vs. the benefits

While borrowing a percentage of the value of your home may seem like the ideal solution to freeing up some cash, as with any lending, it’s vital you calculate the risks and seek sound financial advice before making any decisions.

The costs involved with this type of lending should not be underestimated. Higher interest rates, ongoing service fees and establishment fees need to be factored in. Consider also that interest compounded over several years can quickly add up, effectively eroding the value of your home if property values don’t grow at the same rate as your debt. We suggest you use a spreadsheet to model the effect of the compound interest over several years, and project the amount of debt you could be left with. 

Conversely, a reverse mortgage could provide a solution if you need cash in a hurry – paying the bond to enter a nursing home or urgent medical treatment, for example – so your family don’t need to pay these costs. It’s important you consult your family when making these decisions as ultimately a reverse mortgage will impact their inheritance. 

How much can you borrow?

While each lender has its own policy around reverse mortgages, as a general rule, if you are aged 60 you could borrow 15 – 20% of the value of your home. That number increases as you get older up to around 25 – 30% of your property’s value when you are 70. 

Getting financial advice

For many retirees, the benefit of having enough money to live on without having to sell their home makes a reverse mortgage an attractive proposition. To provide you with clarity around this important decision, get in touch with a Mortgage Express broker to discuss your situation.

References:

https://www.moneysmart.gov.au/superannuation-and-retirement/income-sources-in-retirement/home-equity-release/reverse-mortgages

https://www.canstar.com.au/home-loans/reverse-mortgages/things-consider-reverse-mortgages/


Disclaimer:

While all care has been taken in the preparation of this publication, no warranty is given as to the accuracy of the information and no responsibility is taken by Finservice Pty Ltd (Mortgage Express) for any errors or omissions. This publication does not constitute personalised financial advice. It may not be relevant to individual circumstances. Nothing in this publication is, or should be taken as, an offer, invitation, or recommendation to buy, sell, or retain any investment in or make any deposit with any person. You should seek professional advice before taking any action in relation to the matters dealt within this publication. A Disclosure Statement is available on request and free of charge.

Finservice Pty Ltd (Mortgage Express) is authorised as a corporate credit representative (Corporate Credit Representative Number 397386) to engage in credit activities on behalf of BLSSA Pty Ltd (Australian Credit Licence number 391237) ACN 123 600 000 | Full member of MFAA | Member of Credit Ombudsman Services Ltd (COSL) | Member of Choice Aggregation Services.