There is no doubt that reverse mortgages are not for everyone. But they can be a very useful solution if a homeowner is retired or no longer working for other reasons. Reverse mortgages are a complex product and taking one out requires a high degree of research and investigation before proceeding. But there is no doubt that a reverse mortgage can relieve financial pressure or improve lifestyle options and can impact positively on relationships and the quality of retirement. Before proceeding, it is important to be aware of all the restrictions and benefits associated with a reverse mortgage.

How does a reverse mortgage work?

A reverse mortgage works by enabling the homeowner to use the equity they have in their property as security for a new loan. The loan can take the form of a lump sum, a regular income stream or a line of credit or a combination of these options.

The important feature of a reverse mortgage is that no proof of income is required in order to qualify, as it is targeted towards older-aged borrowers. There are however, much stricter lending requirements to ensure that money is lent responsibly.

The interest that is charged compounds over the life of the loan, and is added to the loan balance. This means that there are no loan repayments for the life of the loan. The ownership of the property does not change and the homeowner can stay in the home as long as they want.

Sound too good to be true? Well there is a catch so to speak, as the loan must be paid in full (including interest and any fees), when the home is sold or the homeowner dies or moves into an aged care facility.

Collins Home Loans’, Finance Manager, Ian Smith, says ‘The most common reason we see to take out a Reverse Mortgage is to take financial pressure off the homeowner. When people retire, they are faced with changes to their lifestyle, which can impact on relationships and cause a great deal of stress.’

‘A reverse mortgage, if done for the right reasons and within the correct parameters, can have a huge positive effect on the homeowner’ Ian says.

What do you need to consider?

• Higher interest rates
• Lower LVR available - this is to off-set the risk of the debt exceeding the value of the property.
• Taking out a reverse mortgage may affect the homeowner's pension eligibility.
• You need to balance a reverse mortgage against any future needs such as payment for an aged care facility.
• If the mortgage is in one name but the homeowner has someone else living with them, that person may not be able to stay in the home after you die.
• Fees for any changes to the mortgage may be higher than usual.

 How much to borrow?

This may sound strange, but the older the borrower, the more they can borrow - as the amount is calculated against how long they are likely to be in the home. You can discuss the amount with your mortgage lender, as different funders have different policies. In general, though, the borrower can expect to borrow between 15% - 25% of the agreed value of the property.

How much will it cost to set up the loan?

The main costs associated with the loan is the compounded interest rate, as well as any set up fees. Depending on the interest rate, the debt can grow rapidly, so it is important to do your sums before hand.

Depending on which funder is used, some reverse mortgage products allow the homeowner to protect a portion of the value of the property. For example, they may be able to lock in a residual of $300,000 to allow for an aged care facility bond. Try out this Reverse Mortgage Calculator to explore your options.

Questions to ask a mortgage lender?

1. Before you sign on the dotted line, check that your lender has a Sequal qualification. This is an extra qualification that Mortgage Brokers must gain to ensure they understand and agree to the minimum standards for Reverse Mortgages (such as a ‘no negative equity’ guarantee).
2. Ask for an outline of the projections for the loan debt and how different interest rate scenarios can modify how much equity you will hold in your home.
3. Are there any restrictions as to what you can do with the money?
4. What happens if the homeowner’s partner dies or if they need to transfer the loan to another house if they move. Does the homeowner need the funder’s permission to sell, rent, vacate or renovate your home or have someone move in with them.

Plesae feel to contact our Sequal qualified Mortgage Broker, Ian Smith at Collins Home Loans if you, your family members or your clients are considering a reverse mortgage. We recommend seeking independent financial and legal advice and speak with extended family before proceeding.

Ian Smith

Finance Manager | Collins Home Loans

Tel. 03 8629 0237 | finance@collinshomeloans.com.au

Useful links:-

ASIC - information guide and calculator

SEQUAL - Senior Australians Equity Release (SEQUAL) was established in 2004 as the industry association for providers of equity release products.