What is a reverse mortgage and does it apply to me?

reverse-mortgageReverse mortgages, otherwise known as lifetime mortgages or equity release loans, are a somewhat novel but increasingly popular way for Australians over 60 to fund their retirement.  A reverse mortgage is a loan that allows homeowners to use the equity in their property as security and release the cash for whatever expense they choose.

What are the advantages?

  • The equity in your home can be released in various forms such as lump sums, income stream, line of credit, or a combination of all three and there are no repayments to make.
  • Generally, you do not need to have an income to qualify for these mortgages so they are ideal for older people looking to turn their assets into cash.
  • All legitimate, reputable reverse mortgage providers are members of SEQUAL (Senior Australians Equity Release), an industry forum that acts to protect consumers. This forum helps Australians be sure that their money and assets are safe from any dodgy operators.
  • SEQUAL allows consumers the option to speak with an accredited equity lease consultant to help to arrange and manage the reverse mortgage. The Australian Securities & Investments Commission (ASIC) advises people researching the option of a reverse mortgage to seek legal advice before making the decision and if you choose an independent financial planner be sure that they hold an ASIC license.
  • ASIC has a useful calculator on their consumer website that can help you to calculate your debt and how much of your home you will still own as time goes by. It also allows you to see how fluctuations and other changes in interest rates and the housing market will affect your equity.
  • New government legislation means that people choosing to take out these sorts of loans benefit from protection from owing more than their property is worth, known as negative equity. This legislation means that when the mortgage ends and the property is then sold, the lender will receive the proceeds and you are protected from liability of any outstanding debt in excess of that sum.

What are the disadvantages?

  • Interest rates for reverse mortgage loans are generally higher than an average loan and this higher rate can mean that even a small reverse mortgage can easily snowball into a substantial debt.
  • If you are the sole owner of the property and you live with somebody who has no entitlement to the home, that person may not be able to reside in the house if you should die before them.
  • Taking out a reverse mortgage could potentially affect your benefits and pension eligibility. Before committing to a reverse-mortgage consumers should talk to Centrelink, the Department of Human Services’ Financial Information Service or pension provider to be sure that their pension will not be affected should they choose to go ahead.
  • Borrowers could be faced with the burden of seeking the permission of the lender if they wish to sell, lease, renovate or move home or if they wish to have someone move in. Potential borrowers should be sure to read the loan terms thoroughly if this would prove problematic and seeking independent advice is recommended.

Does it apply to me?

If you are over 60 and retired, asset rich but cash poor, this may well be the perfect solution for you to free up some cash from your property. Be sure to weigh up the advantages and disadvantages and review the terms thoroughly when making your decision. If you do decide that you want to go ahead, then be sure to seek independent financial and legal advice to ensure that the reverse-mortgage route is right for you. If you still have doubts then you could opt for an alternative in the form of an accommodation bond loan or a home reversion scheme.

The information in this article does not constitute legal or financial advice. If you would like to discuss any of the above in greater detail, please contact your local Axis adviser.

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