What Are Reverse Mortgages? 6 Questions Answered
A Reverse Mortgage is a special type of home loan that allows older homeowners to access the equity they have built up in their homes now, and defer payment of the loan and accumulated interest until they pass away, sell, or move out of the home. This type of loan facility may be desirable to those that own their home but have limited financial assets, such as superannuation or savings, to support a comfortable lifestyle in retirement. Whilst owning your home relieves some of the financial burden, you cannot sell off parts of your “bricks and mortar” to cover living and lifestyle expenses and a Reverse Mortgage, if suitable, can assist with this.
What is a reverse mortgage?
Unlike a traditional home loan, Reverse mortgages require no mandatory loan repayments (there is still the option to make discretionary payments without penalty) and interest charged is capitalised to the loan drawing on existing equity in the property. Whereas a traditional home loan requires evidence of income to service additional borrowings, as well as an exit strategy (additional assets excluding the residential home that can be sold to repay the home loan), Reverse Mortgages do not. Whilst the finance provider will need to be satisfied that the borrower/s have sufficient income to cover their living expenses, they do not require any additional evidence.
How can a reverse mortgage be of benefit?
Some solutions or outcomes that a Reverse Mortgage can provide are:
- Initial Lump Sum payment that could be used for a specific purpose such as installing a lift, renovating a part of the house, a holiday or providing a deposit for aged care.
- Monthly advance which may have the benefit of supplementing existing retirement income
- Cash Reserve Facility – funds set aside for future use or just peace of mind
- Line of Credit which may be beneficial if there is enough cashflow for most circumstances but having a reserve at times is helpful.
It is important to note that some of the above examples may have an impact on your Centrelink aged pension if set up incorrectly. Seeking advice is very important to ensure that the right outcomes are achieved.
Is there a maximum borrowing amount?
The maximum borrowing amount for a Reverse Mortgage is determined by two factors:
- The age of the youngest borrower, and
- The assessed value of the property offered as security.
As Reverse Mortgages do not require mandatory loan repayments, any capitalised interest will impact the equity retained in the home, and the significance of this impact will be governed by both changes in interest rates and property values.
How do you repay a reverse mortgage?
When your home is eventually sold, the balance of the reverse mortgage (including any interest accumulated over the life of the loan) will need to be repaid. This will impact the proceeds that will be available for aged care, medical treatments or to continue funding a comfortable lifestyle. Additionally, any inheritance to be left will be impacted, which is why it is a condition of Reverse Mortgage finance that you obtain legal advice, as your Solicitor will discuss Estate Planning with you as part of the advice.
What customer protections are in place?
Reverse Mortgage facilities are offered by limited Lenders in a highly regulated industry, and significant due diligence is undertaken. Lenders will often offer a guarantee that you will never be in a position where you owe more on your home than what the home is worth, offer loan projections provided to show the impact a Reverse Mortgage may have on equity in your home over a period of time. Finally there is a requirement for borrowers make an informed decision before proceeding via education provided by the lender or broker as well as mandating that independent legal advice is obtained.
Can Vision help with reverse mortgages?
Yes! At Vision, our Property and Finance Experts are dedicated to providing the best solutions to suit our clients’ needs. If you would like to discuss reverse mortgages with an experienced Mortgage Broker, contact Vision today.