What is a Reverse Mortgage?

In this day and age there many financial terms and products that we all hear about from time to time.  One that will become more and more common in Australia is the Reverse Mortgage.

A Reverse Mortgage is a loan to people aged 60 or over that does not require regular repayments.  The great thing about a Reverse Mortgage is that it provides choices, as the finance can be tailored to suit the borrower’s needs.

 

In broad terms, you need to be a home owner with the youngest borrower at least 60 years of age.  

Facilities can be arranged to draw a lump sum, regular income payments or a combination of both.  The lender legally accepts the loan risk based on your age, property value and interest rates to give you security and peace of mind, knowing that you cannot be forced to leave your home.  The loan is eventually repaid when the last title owner passes away, moves into aged care or when the property is sold.

The mechanics of a Reverse Mortgage are quite simple, though the features and conditions of each lenders’ products vary.  An existing home loan can be rolled into a Reverse Mortgage provided the loan amount does not exceed the lender’s loan to valuation ratio (LVR) limit.

Key facts about Reverse Mortgages

  • No requirement to make regular loan repayments
  • Interest and costs are added to the loan amount which compounds the amount owed
  • Lenders are legally responsible for the risk where the loan may exceed the value of the property.  All lenders have a ‘No Negative Equity Guarantee’ built into their products.
  • Facilities can be arranged to draw a lump sum, regular income payments or a combination of both
  • Reverse mortgages come under special regulation and require additional broker qualifications
  • Most lenders require you to seek legal advice before proceeding

Clever uses of a Reverse Mortgage

An obvious use of a Reverse Mortgage is to provide funds for a specific purpose, such as upgrading an old bathroom or replacing a car but they are also being used in other clever ways.

Reverse Mortgages are becoming more popular today as a tool to supplement income or capital needs in retirement.  For instance, the funds that are drawn upon are not assessed as income from a Centrelink point of view.  For some this is a handy way to increase regular income after the recent cuts to Centrelink payments without needing to downsize their home.  For others, it’s a way to reduce the reliance on their superannuation or other investments.

Another form of Reverse Mortgage is an accommodation bond, which allows funds to be drawn against the home to pay for aged care costs without the need to sell.  This gives family members time to decide if they are going to keep, sell or rent the house in an orderly fashion.

Reverse mortgages are specialist products that are not typically offered by mortgage brokers or bank branches so it’s recommended to speak with a specialist in this area.

 

About the Author – Bob Budreika

My experience in financial services dates back to 1988. I’ve been an advocate for the evolution of our industry into a true profession.

The cornerstone of any recognised profession is a high standard of education and this is something that I have always supported and encouraged.

The real value of education, however, is where knowledge is adapted to benefit people practically based on their particular circumstances and objectives. This is where my wealth of experience and, taking a common sense approach, creates meaningful outcomes for people.

 

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