Reverse MortgagesFor many Australians, their home is their biggest asset. It is common for people to reach retirement with significant equity in their home, but without the necessary income to support their lifestyle or to meet their expenses. This is often referred to as being asset rich and income poor. One option available to retirees is to access the equity in their home by taking out Reverse Mortgages .
While Reverse Mortgages have been popular for a number of years in the USA and UK, they have only recently become available in Australia. These types of home loans are often used to refinance standard mortgages.
What is a Reverse Mortgage?
A reverse mortgage enables retired homeowners to access the equity in their homes, without having to sell their home. You donâ€™t have to make a monthly repayment. The loan is simply repaid when you cease to occupy your home as a principal residence. This can be when you sell the home, or permanently move out, or the last surviving owner passes away. Instead of making regular repayments, the interest simply gets added on to the total loan amount each month.
Equity Release Loans
Another name for a Reverse Mortgage is an Equity Release loan. They may also be referred to as a Seniors Equity loan or an Equity Tap loan.
What can I use the money for?
You can use the proceeds of the loan for almost any worthwhile purpose. Common uses include paying for a vacation or new car, modifying your home (installing a ramp, extending the house), paying off debts, paying taxes or simply supplementing your retirement income to cover daily expenses. You may also use it for Wealth Creation or paying off Credit Cards. This credit card comparison helps you to find the best credit card for your needs. Apply online here for the best one
How Much Can I Borrow?
The amount of money you can borrow depends upon the age of the youngest borrower, the value of your home, current interest rates, and where you live. In general, the older you are and the more valuable your home, the more money you can access.
The loans available vary from lender to lender. As a general guide, the minimum age is around 60 years to qualify for a Reverse Mortgage and you can access around 10% to 15% of the value of your property. As you get older this amount increases to around 45% of the value of your property.
There are no repayments so there is no requirement to prove serviceability of the loan. There are no income or medical requirements to qualify. You may be eligible for a reverse mortgage even if you still owe money on the property.
How is the Money Paid?
The funds can be advanced as a lump sum or as a regular payment over a number of years (usually around 5 to 10 years). Some lenders offer the option of a Line of Credit that is available for you to draw on as required.
Paying Back Your Loan
The loan is repaid when any of the following happens:
- Both of you have moved out of the home (eg into a smaller home or into aged care)
- Both of you have passed away
- The house is sold
What Happens when the House is Sold?
When the property is sold, the loan is paid out and any surplus funds are paid to your or to your estate. You would be advised to review your will when taking out a Reverse Mortgage to ensure it reflects your current situation.
Can I make Repayments to my Loan?
You will need to check the rules with your chosen lender. However, generally speaking, you can pay off all or part of the loan at any time.
Will rising interest rates affect my loan?
The interest charged to your loan will vary as interest rates rise and fall. Some lenders have fixed rate or capped rate options as well as the normal variable interest rates, so it pays to do your homework first.
Will a Reverse Mortgage Impact my Centrelink Payment?
A reverse Mortgage can potentially affect your income and/or asset position. We strongly recommend you contact Centrelink to discuss your situation before taking out a Reverse Mortgage. Centrelink can be contacted on 13 23 00.
Do I have to give up the title to my home?
This varies from lender to lender. Generally speaking, you would retain 100% ownership of your home. There are schemes available that involve a lender taking part or total ownership of your home. You would be advised to seek professional advise from a solicitor or financial planner before taking this option.
How long can I stay in my home?
Reverse Mortgages generally allow you to stay in your home for as long as you want.
No Negative Equity Guarantee - Can the Loan Amount ever exceed the value of the home?
When the loan amount exceeds the value of the loan it is known as Negative Equity. For Example, if the loan amount grew to $400,000 and the property was only worth $350,000 you would be in a negative equity situation.
The good news is that lenders calculate their maximum loan amounts in such a way that it would be highly unlikely for you to ever reach a Negative Equity situation. Most reputable lenders include a No Negative Equity clause in their contract to protect the borrower. You would need to check the contract before signing.
Do I need to seek professional advice before taking out a Reverse Mortgage?
We would advise you to seek your own independent advice before signing up with a lender or broker. Most reputable Reverse Mortgage lenders would also ask you to get advice from a Solicitor and/or Financial Planner before committing to a loan. The lender will usually require the solicitor or financial planner to sign a form confirming that you have received independent advice. With some great Wealth Creation Strategies you can end up not only owning your own home, but a good range of property investments
Make sure your lender is a member of SEQUAL
Senior Australians Equity Release Association of Lenders (SEQUAL) is a not for profit association supported by Australiaâ€™s leading providers of Equity Release products. SEQUAL was set up to ensure the professionalism of lenders offering Equity Release loans (Reverse Mortgages) in Australia.
All members of SEQUAL have voluntarily agreed to adhere to the SEQUAL Code of Conduct. Only SEQUAL approved members can display the SEQUAL logo on their web site, on their brochures and printed material, as a confirmation that they have been endorsed by SEQUAL on the terms of this Code of Conduct.
A recent Choice consumer survey found that some mortgage brokers provided a poor level of information; often recommended people borrow larger amounts than they needed and the contracts can contain very heavy penalty clauses.
Reforms in the finance brokers legislation specific to reverse mortgages include.
- Disclosure of the time when the amount to be repaid would be greater than the consumerâ€™s equity in the home;
- Should a consumer be anticipating future expenses, such as retirement village accommodation, the broker would estimate the time at which the equity in the home would be insufficient to meet those expenses;
- The effect of the product on pensions and taxes as well as the possible term of the contract, given the client's age and life expectancy; and
- The client's plans for their estate must been taken into consideration.
My advice? Talk to the leaders of the home mortgage industry that have a reputation for getting results as well as great customer service. My favourite broker for reverse mortgages is listed below :
Paul Neary - The Mortgage Bureau - Baulkham Hills - PH 02 9629 1888
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