Reverse Mortgages

What is a reverse mortgage?

Targeted towards older Australians, a reverse mortgage provides access to funds by utilising the equity that’s tied up in a property as loan security. Generally, the amount of equity that can be released from the homeowner’s property is based on the age of the borrower and the value of the property.

How does a reverse mortgage work?

A reverse mortgage is structured in a way where interest is charged like a normal home loan, however you don’t have to make regular repayments. Instead, the interest charged on your loan amount compounds over time and is added to the initial loan amount.

Once it is time to sell the property, either the borrower or the estate will have to repay this interest as well as the loan balance initially borrowed.

With a reverse mortgage, the borrower has the choice to receive the loan as either a lump sum, a regular income stream, a line of credit, or as a combination of any of these options.

A key feature of a reverse mortgage is that it allows borrowers to live in the property without having to make repayments. Once the borrower or the estate sells the property, the reverse mortgage loan will need to be repaid to the lender in full.

Typically to qualify for a reverse mortgage, lenders require the borrower to be at least 60 years of age and have paid off their home loan, or discharge the home loan as part of taking out a reverse mortgage.

How much can you borrow with a reverse mortgage?

The amount that you can borrow with a reverse mortgage will ultimately depend on the amount of equity you have in your home. While this is the case, generally you will only be able to borrow a certain percentage of the equity depending on your age and other factors.

According to Moneysmart, at the age of 60 the most your lender may allow you to borrow is approximately 15% to 20% of the value of your home. As a guide, Moneysmart says you can expect to add an extra 1% to how much you might be able to borrow with a reverse mortgage for each year you are over 60, while the minimum you’ll be able to borrow is typically about $10,000.

To help determine whether a reverse mortgage could be right for you, check out Moneysmart’s reverse mortgage calculator.

Reverse mortgage rates and fees

Borrowers can expect to receive an interest rate that is typically higher than that of a standard home loan given that repayments are made purely on interest.

The fees and charges associated with reverse mortgages are also likely to be higher than those attached to standard home loans. Fees and charges will vary from lender to lender, however it is likely that establishment fees, ongoing or annual fees, or discharge fees will be included in the amount owing on the reverse mortgage. This may result in having to pay extra interest over time.

Who provides reverse mortgages?

Despite limited reverse mortgage offerings from major banks, there remains a number of options available from mutual banks and smaller lenders. Some providers include:

• G&C Mutual Bank
• IMB Bank
• P&N Bank
• Australian Seniors Advisory Group
• Heartland Finance

Reverse mortgage pros

1. Access property equity without having to sell

Utilising a reverse mortgage allows borrowers to obtain extra cash while still owning and living in their own property.

2. No restrictions

There are no limits or restrictions as to what borrowers can utilise funds for, including retirement funds, taking a holiday or paying down debt.

3. Flexibility

Reverse mortgages can be paid as either a lump sum, a regular income stream, a line of credit, or as a combination of any of these options.

4. Repayments

With a reverse mortgage, regular repayments are not required as the interest charged on your loan amount compounds over time and is added to the initial loan amount.

Reverse mortgage cons

1. Higher interest rates than a typical home loan

Reverse mortgages will typically offer higher rates and fees than traditional home loans.

2. Irregular repayments

By not making regular repayments, the interest on the outstanding balance plus any fees involved has the potential to compound significantly over time. The effect of compound interest means you may end up owing much more than you expected and be left with a form of ‘bill shock’ when you sell the home.

3. Interest rates may rise

As with any mortgage, interest rates have the potential to rise meaning borrowers are required to pay more in interest over the life the loan.

4. Property values may fall

In similar fashion to interest rates, falling property prices will mean your property has less equity. This could impact borrowing amount and the potential for borrowers to achieve specific goals with a reverse mortgage.