Reverse Mortgages

A Reverse Mortgage allows a homeowner to borrow money using the equity as security.

It is a type of home loan available to those in Australia aged 60 and over, and it assists people who may be asset rich, but cash poor. Or those who do not wish to tap into their superannuation.

Interest is charged on a reverse mortgage as it is for any loan, but the borrower is not required to make regular repayments. The debt plus any accrued interest and fees is repaid from the sale of the property, either when it is sold or when the last surviving borrower passes away. It can also be refinanced.

How Does a Reverse Mortgage Work?

A person with a reverse mortgage remains in their home and does not make repayments. Interest is charged on the loan and the interest rate is typically higher than a standard home loan. The loan must be repaid in full, along with fees and interest, when the home is sold upon the person’s death.

Reverse mortgage lenders apply different criteria, but as a general rule, as a person gets older, they are able to access a higher proportion of the equity in their home or investment property.

There are strict guidelines in terms of the loan to value ratio (LVR) that borrowers can release. It’s all determined by age.

For example, a person over 60 may be able to access funds worth 15% or 20% of the total property value. As a guide, add 1% for every year past 60.

What Are the Pros?

Perhaps the biggest benefit of a reverse home mortgage is that it allows a person to remain in the home they love. There is no need to sell the house to release some cash.

It also comes with a negative equity guarantee, which means that even if a property decreases in value to the point that it is worth less than the loan (which is known as ‘negative equity’), the borrower will never owe the lender more than what the home is worth.

Reverse mortgages are the most heavily regulated financial credit product in Australia. There are some very strong consumer protections enshrined in the regulation, one of which is a no negative equity guarantee,” says Moffatt.

To benefit from the guarantee, three conditions must be fulfilled. Council rates must be paid on time, the property must be insured, and all necessary repairs must be made.

What Are the Cons?

A reverse mortgage can turn out to be costly if the wrong loan structure is chosen for your circumstances. Choose a lender carefully and weigh up the different alternatives they propose. A reverse mortgage is more complex than a standard home loan.

Will you take out a lump sum or a cash reserve? You don’t want to needlessly incur more interest charges than you need to.

It may not be cheap to obtain a Reverse Mortgage. Lender, valuation, legal and financial advice fees may be applicable.

What to Consider Before you Apply

PHA Financial Services encourages families to talk about the possible implications of a reverse mortgage. We have encountered a small minority of children who are more focused on the size of their inheritance than on the day-to-day financial needs of their parents.

In our experience, grown adult children and beneficiaries are generally very supportive of parents using these loans. But there have been cases where the children were not super happy with it. It’s better to put everything on the table before you embark on this kind of loan.

A lender who has left this market, required a Stat Dec to be signed by the borrowers that they had discussed this with their children.

There are also potential implications for the age pension to be mindful of.

In our experience, borrowing funds through a reverse mortgage will not affect the age pension. But please check with Centrelink or a Financial Planner.

If the funds are used to gift money or make an investment, it may be assessable under the assets test and reduce the pension amount. So always check with Centrelink first.

All lenders will require you to obtain legal advice and some lenders will require you to obtain financial advice.

How to Qualify for a Reverse Mortgage

• It is available to people over 60 who own their own home.

• The borrowers must match the names on the security title.

• The youngest borrower must be 60.

• It is available with either your own home or your investment property.

• There are some regional postcode restrictions.

This information has been prepared by PHA Financial Services and does not take into account your objectives, financial situation or needs. Before acting on this information you should consider whether it is appropriate to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. The information provided was accurate at the time of publication and changes in circumstances after a document is published may impact on the accuracy of information. Some information may have been collated from various third parties and we make no assertion that the information was originally ours.

Partially sourced from Forbes Advisory.