A reverse mortgage is a loan designed specifically for seniors who own, or mostly own, their own homes.
Reverse mortgages allow you to borrow funds against the value of your home at a time when you need it the most and are unlikely to qualify for any other sort of loan.
Unlike other types of loans, there are no regular repayments. The debt is repaid from the future sale of the home, generally when downsizing later in retirement or moving into aged care.
How it works
You can use a reverse mortgage to increase your retirement income, refinance debt, improve or maintain your home, fund medical costs or aged care, buy a new car, caravan, overseas holiday and any other worthwhile purpose.
- You have the option of taking the funds as a regular income, a lump sum or as a cash reserve facility (similar to a line of credit) or depending on your level of equity and home value, a combination of these.
- These loans are very flexible. You can sell your home at any time – with no penalty to your loan.
- You can also choose to make payments in part or full at any time – though no repayments are required.
- If you are receiving a regular draw down, you can choose to stop these payments if you decide you don’t want or need them, or you can choose to increase them if your financial position allows you to.
- You do need to be aware that accessing the wealth in your home in this way will reduce the amount of equity you have in your home over time.
- Fees and interest are added to the loan balance as you go, and the interest compounds. This means you will pay interest on your interest, plus you will pay interest on any fees or charges added to the loan.
- Over time, the amount you owe the lender will increase and the longer you have the loan, the more the interest compounds and the bigger the amount you will have to repay.
- The loan is due to be paid out when the home is sold. The lender receives the total loan amount (including all accrued interest and charges) with the balance of the sales proceeds going to the borrower.
- Should the total value of the loan be more than the sale price of the house, the borrower is not liable for the difference and the lender has to wear the loss. See more on this below.
Reverse mortgages are tightly regulated by government with inbuilt protections for borrowers.
This includes the No Negative Equity Guarantee, which was introduced in 2012.
This means that Australian borrowers are protected by law and cannot owe lenders more than their home is worth, regardless of what happens to the value of their property.
In addition, borrowers always retain ownership (the title remains in the name of the borrower) of their homes.
It also means that they cannot be removed from their home by the lender, nor be forced to sell their home at any time against their will.
Even if their home devalues dramatically, the borrower can continue to live in it for as long as they choose, repaying the lender only when the house is sold in the future.
For more information on reverse mortgages, click here.