Reverse mortgage or line of credit

Should you take out a reverse mortgage or line of credit?

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. 

Q. Len

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.





    COMMENTS

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    tams
    5th Mar 2015
    10:37am
    Hello Len
    Allow me to provide some further details.
    A standard Line of Credit requires regular repayments according to the amount of credit used and the interest rate applied. If you cannot service the loan it is not available to you.
    There are three reverse mortgage products which allow regular drawdowns to ease "the burden of living on a budget".
    1) one reverse mortgage allows you a limit facility to draw down your funds. Designed like a Line of Credit, the disadvantages are
    a) it has the highest interest rate and application fees, together with a monthly account keeping fee.
    b) the interest applied to the loan is deducted from the loan limit, so that you are never able to access all of your funds.
    2) The two other reverse mortgages are similar in terms of providing a lump sum, regular drawdown and a reserve for possible future needs.

    We are now seeing more seniors accessing equity to pay for private health insurance, car house and contents insurances and council rates, leaving their retirement income in terms of aged pension/private investment/superannuation to cover the other costs of their retirement needs.

    Paul Dwyer
    Reverse Mortgage Finance Solutions
    LiveItUp
    9th Mar 2015
    2:08pm
    I have a line of credit that requires no regular payments and the interest is added to the value of the loan. It's interest rate is the same as a home loan now well below 5% and I pay no fees. It has been in place now for about 8 years and the bank is more concerned about trying to get me to use more of it than about the serviceability of the loan.
    KSS
    9th Mar 2015
    1:41pm
    Doesn't everyone have the 'burden of living on a budget' regardless of the stage of life they are at?

    I wish I didn't have to live on a budget! But sadly that's not the case.

    8th Nov 2015
    11:46am
    I GOT A FAST APPROVED LOAN @ 2% INTEREST RATE
    Hello friends, i will advice you to get a loan @ 2% interest rate from marianlawson@outlook.com loan company to pay all your debt. Explain your self to her and she will give you hug amount with more years to pay back . My debt make me so restless because i was not giving my kids a good life and i do want my kids to grow up with the debt
    Lewi
    6th Apr 2016
    1:37pm
    I nearly had a reverse mortgage we wanted buy cost us 1200 financial advisor 1500 valuation 3000 for solicitor and de bank wanted 1200 as wel for a 50.000 loan until they make this easier we wont be in it losing 6900 before we start we don't have solicitors laid on and financial advisors why cant those banks or brokers do without al the legal jargon