What are Reverse Mortgages
Reverse mortgages are loans for pensioners and retirees that are designed specifically for older borrowers who are typically have high worth in assets but may need to release cash.
Known variously as ‘senior’s loans’, ‘reverse home loans’, and ‘senior’s finance’, reverse mortgages are the most popular form of home equity release in Australia.
Reverse mortgages allow people from the age of 60 to convert the equity in their property into cash for any worthwhile purpose such as renovations, health costs or aged care. Applicants are assessed to ensure they have enough income to continue to pay their council rates and building insurance on the property being mortgaged. Borrowers should be in receipt of a pension as a minimum.
Although interest is charged like any loan, the borrower is not required to make repayments (although they can usually make voluntary payments if they wish which may be redrawn) - see below for when the debt is repaid.
The borrower will be charged interest on the loan amount borrowed, fees and interest are added to the loan balance, and the interest compounds. Over time, the amount you owe the lender will increase, and the longer you have the loan, the more the interest compounds and the bigger the amount you will have to repay.
How do Reverse Mortgages work?
As with normal home loans, a reverse mortgage is secured by first registered mortgage over the borrower’s house (ie. the present mortgage would be paid out for you as part of the reverse mortgage). The amount of equity that can be released is determined by age and the value of the security property (although lenders have different policies on how much they will lend). Crucially however, the borrower retains full ownership and is able to stay in their home as long as they want.
The interest is ‘capitalised’ (charged back to the loan account) and will compound over time ie. the balance of the loan will increase unless voluntary payments are made.
The debt, including all interest and fees owed, is repaid to the lender when:
How will the funds be paid?
Reverse mortgage loan products are becoming more flexible and increasingly sophisticated as the market develops. It depends on which lender you choose, but atthe moment the borrower can take the funds either as:
What about your pension?
Your pension may be affected and will depend on your individual circumstances and what you require the money for or when you intend to use the money.
In general, if you are on a full pension and have little or no other income or assets and are requiring money to do some renovation for example, then it does not generally affect your pension.
We do ask that you seek advice from Centrelink on your personal situation when going into a reverse mortgage.
Do you need Legal Advice?
Once the loan is approved you will be issued with the legal loan agreement and documents. These must be taken to your lawyer for advice and be witnessed.
The Reverse Mortgage Calculator will help you to figure out how much your debt will increase over time and what this means for the equity in your home.
Please do not hesitate to contact us if you require clarification of this service.
Click below for key information on reverse mortgages provided by ASIC's Money Smart:
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