Should you take out a reverse mortgage or line of credit?
Len is considering accessing the equity in his home, but is confused whether a reverse mortgage or line of credit is the best option to do this.
As we own our home outright, we would like to ease the burden of living on a budget and release some of the equity. We’ve looked into a reverse mortgage and think this could work for us. However, a friend has suggested a line of credit against our home, and we’re wondering if this is better. Do you have any advice?
A. Firstly, financial advice can only be given by a qualified professional. Since choosing the right option for you is vital for a successful financial future, it is certainly worth consulting an independent financial advisor before making a decision. However, in general, the basics of each option are outlined below.
You have already looked into a reverse mortgage, so I’m assuming you understand that the amount you can borrow depends on your age and the value of your home. Repayments are generally deferred until you no longer live in the home, when you or your estate will pay the amount released, plus accumulated fees and services. What you do with this money, and any interest it earns, may affect any government benefits you receive, so it is worth considering this and discussing with Centrelink before you progress. A typical interest rate on a reverse mortgages is around six to seven per cent.
You can find out more at Moneysmart.gov.au.
A line of credit also releases equity in your home and therefore you’re likely to need a bank valuation to ascertain the market value. The money isn’t released to you as a lump sum; instead, you have access to draw down the cash, by cheque or card, as and when it’s needed. You do not have to repay the principal amount drawn down, only the interest fees and charges. Most lines of credit are portable - i.e. you can transfer them should you move home. As you don’t have a large lump sum sitting in an account, no interest is earned and therefore it is unlikely any government benefits will be affected. The typical interest rate for a line of credit is around five to six per cent.
Find out more about lines of credit at Yourmortgage.com.au.