A reverse mortgage allows you to borrow money using the equity in your home as security. The loan can be taken as a lump sum, a regular income stream, a line of credit or a combination of all three of these options.
Interest is charged just like any other loan except that you do not have to make any regular repayments while ever you live in the home. The interest will compound over the life of the loan and keeps adding to your loan balance.
You will remain the owner of your home and can stay in the home as long as you want. Unlike a normal loan, reverse mortgages have no fixed term. However, the loan must be repaid in full:
- once you (and your spouse, if applicable) die;
- if you move out of your home, for example into aged care;
- if you sell your home; or
- if you breach any term of your loan.
However, you need to be aware that there are some potential risks for the unwary.
The interest rate for a reverse mortgage is generally higher than an average home loan, and the amount of the loan can rise quickly as the interest compounds over the life of the loan and is added to your loan balance.
That is, you pay interest on interest and interest on any fees or charges added to the loan balance. For example, let’s say your home is valued at $320,000 and the value of your home is estimated to increase by 3.5% each year. You want to borrow $60,000 over a 10 year period. In this scenario your loan will increase from $60,000 to $140,655 leaving you with $310,737 equity in your home.
The loan may affect your pension eligibility, and you may not have enough money left for aged care or other future needs.
Depending on the amount borrowed you could end up owing more than your property is worth.
Your decision could Impact on your family, so if you have children it is important for them to know what will happen to the family home when the loan is paid out. If your aim is to leave money for your children when you die, the reverse mortgage could impact on this.
Some reverse mortgages also set a limit on how much you can owe. If the balance of your loan exceeds the proceeds of the sale of your home, no claim for this excess can by made against your estate or other beneficiaries.
However, some reverse mortgages let you protect a fixed proportion of your home’s value. This ensures that you have money for future financial needs, for example aged care accommodation.
You should obtain proper legal advice before signing any documents. Your solicitor is the best adviser to ensure that you fully understand the consequences of the reverse mortgage.