A reverse mortgage allows you to borrow money secured against your home, without having to pay back either the amount you borrowed or the interest due until you leave your home or die. Instead, your debt and interest builds up (or compounds) over time. They are generally restricted to senior Australians. You will generally be required to maintain and insure your home and pay your rates at your own expense. The number of these equity release products on the market has increased from three to 18 products in the last two years. ‘While reverse mortgages may provide a useful way to release equity in people’s homes, they involve significant risks and should be handled with care,’ ASIC’s Executive Director, Consumer Protection, Mr. Greg Tanzer said.
Before you take out a reverse mortgage, ASIC suggests you need to:
• get independent financial advice to help you decide whether the product is likely to be able to meet your needs now and in the future;
• ask an independent solicitor to check the contract and explain the fine print; and
• discuss your intentions with your family
The new calculator on our consumer website MoneySmart , at www.moneysmart.gov.au shows how debt can build up and may affect how much of your home you still own as time goes by.
The MoneySmart reverse mortgage calculator shows the effect on the equity in your home based on decisions you may make about:
- how much you borrow;
- whether you take an initial lump sum, or arrange regular payments or a combination of both;
- how long you borrow for;
- interest rates and various fees; and/or
- changes in home values.
MoneySmart’s website has lots of tips on understanding equity release products (including reverse mortgages) and the questions to ask before you commit to one.