Given that for those over 65 years of age, 70 per cent of their wealth is tied up in the family home, it’s not surprising that a growing number of Australians are considering equity release products, such as reverse mortgages to help manage financial commitments. However, such products have received their fair share of bad press, so it’s understandable that people are reluctant to commit without knowing more.
How do they work?
A reverse mortgage allows you to access the capital in your home, using the property as security. The money released can be taken as a lump sum, regular payments, a line of credit or a combination of all three. Which method suits you best will depend on how much money you need to access, what you need to access it for and what impact on your Age Pension or finances it will have.
The interest on the money borrowed accrues and is compounded, so you don’t make any repayments until you vacate the property. You remain the legal owner of the home and can live there for as long as you wish.
Who can get one?
To qualify for a reverse mortgage, you have to be over 60 and have sufficient equity in your property. You do not need to have an income, but lenders are required by law to lend money responsibly, so not everyone will automatically be granted such a loan.
How much can you borrow?
How much you can borrow depends on your age, although it will also vary between products. The minimum amount you can borrow is around $10,000 and the maximum is a percentage of the value of your home, which increases the older you get. Typically, you can borrow between 15 and 20 per cent at age 60, with this rising one per cent for every year above this age.
How much does it cost?
Fees and interest rates will vary between products and it’s worth noting that interest rates for reverse mortgages are often higher than standard mortgage rates. As the interest is accrued and compounded, the amount you actually owe can increase rapidly. Some products will allow you to protect a portion of the value of your home so that you can put some aside for an aged care bond or similar.
What if I end owing more than my home is worth?
Any reverse mortgage product taken out after 18 September 2012 must include negative equity protection, so you can’t owe more than your property is worth. Should the property be sold for less than is owed, neither you nor your estate can be held liable for the debt, unless there have been fraudulent practices by you or on your behalf. If your home sells for more than is owed, you or your estate will receive the additional funds.
Are there any risks?
As with every financial transaction, there are risks involved. You should note:
- interest rates are often higher than average home loans and can rise considerably over the period of the loan if a variable option is chosen
- a fixed interest rate agreement can be expensive to break
- compound interest can cause the debt to rise rapidly
- what you do with money may affect your Age Pension
- if you’re the sole owner of the property and have a dependant staying in your home, that person may not be able to stay there should you die
If you think a reverse mortgage could be for you, you need to:
- undertake more research
- check with Human Services how your benefits may be affected
- get independent financial and legal advice
- check if your preferred providers are members of Senior Australians Equity Release (SEQUAL) and adhere to the minimum standards it requires from its members
The next step is to consider which provider is best for you and to help you make the decision, you should ask each one the following questions:
- Can you have a reverse mortgage information statement that includes the following information:
- how the reverse mortgage works
- how costs are calculated
- what you need to consider about the product and how it suit your financial circumstance
- contacts for more information?
- Can your provider go through the mortgage calculations with you in person, using an approved reverse mortgage calculator? You should also receive a printed copy of the calculations.
- If your home already has a mortgage, are there any special arrangements required?
- Are there any restrictions on what you can do with the money?
- Is there a cooling-off period? If so, how long is it and when does it start?
- What happens if your circumstances change? If a co-borrower dies, there’s a divorce, or you need to move home, how does this affect your agreement?