Reverse mortgages have become more popular given that for many older Australians, the equity in their home has increased significantly during the pandemic property boom. It can be extremely helpful to be able to tap into that equity when the cost of living is so expensive. Attwood Marshall Lawyers Property and Commercial Law Graduate, Mieke Elzer, recently joined Robyn Hyland on Radio 4CRB to discuss the benefits and drawbacks of reverse mortgages.
What is a reverse mortgage?
A reverse mortgage can help retirees tap into the equity they have built up in their home to utilise as a source of income. It is not uncommon for older Australians to be asset rich, but cash poor, which is why a reverse mortgage can be a great solution. The fact that our population is aging means that more retirees are looking for ways to finance their future living arrangements.
Unlike a regular mortgage, where a person borrows money from a lender and the borrower repays that loan over time with interest, a reverse mortgage is exactly as the name suggests; the lender pays the borrower a lump sum amount, or regular payments by way of a draw down on the loan, on the security of the property they already own outright without the need to make regular repayments. The lump sum payment or other draw down payments then accumulate a loan on the property. The longer the reverse mortgage is in place, the higher the loan amount will grow with the interest accruing over that time. Although you do not need to make regular repayments off a reverse mortgage, the borrower will need to have an exit strategy in place where the lender will be repaid the entire amount of the loan, plus interest and associated fees. This may involve repaying the reverse mortgage by a specific date or more typically, paying it from the estate of the borrower after death.
Reverse mortgages have their benefits, and their drawbacks, and both should be weighed up before deciding whether taking out a reverse mortgage is the right option for you. The Australian Securities & Investments Commission carried out a review of reverse mortgage lending in Australia in 2018, which made recommendations for the conduct of lenders and discussed their role in identifying financial elder abuse. The main issue was avoiding a ‘negative equity’ situation where there was not enough equity in the property to repay the loan when either the borrower died, or the property was sold.
Determining how a reverse mortgage will be repaid can affect your partner, family, or anyone else that may live in the home; therefore, it is important to discuss the complexities about reverse mortgages and get independent advice to ensure you understand what you are signing and how to plan for the future.
Who is eligible to apply for a reverse mortgage?
Depending on which lender you are approaching, the eligibility criteria to obtain a reverse mortgage may differ slightly.
Generally, a borrower must be aged 60 years or older, and must own their home outright. That means there can be no outstanding mortgage on the property, even if it is only a very small one.
There is no specific income eligibility for reverse mortgages; however, most lenders will follow responsible lending requirements before granting a reverse mortgage. Lenders will want to know how the borrower plans to repay the loan when the time comes.
How much can a reverse mortgage allow someone to borrow?
The amount of money a borrower can access will depend on their age and the value of their home.
As a guide, if a borrower is 60 years of age, they will be eligible to borrow 15-20% of the value of their home. This percentage will typically increase by 1% for each year the borrower is over 60. For example, a borrower who is 65 and owns an unencumbered property valued at $1 million, can likely borrow between $200K-$250K.
There is a minimum amount that can be borrowed with a reverse mortgage. This varies but is typically around $10,000.
The benefits of a reverse mortgage
- Live more comfortably: With the cost of living on the rise, everything from electricity, gas, petrol, insurance, and food are placing financial strain on Australian households. While many retirees may own their own home and thus be protected from interest rate rises, the rising cost of living is still taking its toll and many retirees are feeling the pinch on their everyday expenses. A reverse mortgage can give homeowners the option to free up the equity in their home to be used daily, as an alternative to having to sell their home to be able to meet their ongoing financial obligations and live the life they want to live in their later years.
- Stay at home longer: A reverse mortgage can help people remain in their home for much longer. This is a real benefit, offering borrowers stability later in life, and of course the ability to benefit from 100 per cent of the property’s capital growth.
- Flexible finances: Reverse mortgages provide the borrower with flexibility to have money paid as regular income or lump sum payments. Having access to various options can help retirees get more enjoyment out of their life, not only providing them with a more comfortable daily living allowance but also giving them the financial means to go on more holidays or take up additional social activities.
- Covering medical expenses: A reverse mortgage may also save the day for older Australians who have mounting medical expenses or care service expenses that may be required as you or a loved one gets older.
Reverse mortgage risks
Whenever you are looking at a financial product or taking out a loan, there are always risks and it is important to consider your own unique circumstances before you take that leap.
The main risks to consider include:
- Additional debt: The more borrowed over the course of a reverse mortgage, the less equity the borrower will have in their home, and more debt either the borrower, or their estate, will eventually need to repay. A key consideration should be that drawing funds from the property reduces what the borrower can potentially access at a later date. Many borrowers of reverse mortgages choose to quarantine a certain percentage of their equity, enough to cover the costs of relocating to an aged care facility if needed. With aged care costs also on the rise, this is certainly something to keep in mind when planning for the future and making financial decisions that impact the equity in your home.
- Interest charges and fees: Interest rates on reverse mortgages are usually higher than a standard home loan and this will need to be factored in when planning how the loan will be repaid, and when.
- Falling property prices: Property values must be considered and how this might impact the amount a borrower can safely borrow.
- Accessing the age pension: It’s very important to consider how any cash held from a reverse mortgage may affect the borrower’s ability to access the age pension and other government benefits.
Advice for anyone who may be exploring taking out a reverse mortgage
Anyone considering a reverse mortgage on their property should do their homework and shop around. By doing sufficient research and comparing multiple lenders, a borrower may be able to find a better interest rate which can save a significant amount of money in the long run.
When approaching a lender about a reverse mortgage, it is important to get all the information needed to make an informed decision.
Lenders are required to provide a “Reverse Mortgage Information Statement” to potential borrowers. If there is anything that is unclear in the documentation provided, don’t be afraid to ask more questions. Remember, a lender must show potential borrowers the long-term impact of a reverse mortgage and how this will diminish the equity in their home. Don’t glaze over this information as it will help provide an understanding if the reverse mortgage is the right fit.
Reverse mortgages that were taken out after 18 September 2012 have Negative Equity Protection, which ensures the borrower can never end up owing more than what the home is worth. This protection puts a responsibility on lenders to run different scenarios with the borrower to ensure they understand what may happen with interest rates rising, or if housing prices continue to fall.
As for the best place to start if you are considering a reverse mortgage, seek trusted independent legal and financial advice to talk about your intentions.
An experienced property lawyer and a reputable financial adviser will be able to explain the ins and outs, and ramifications of taking out a reverse mortgage, and guide you through some of the other issues that should be considered, such as updating your estate plan to ensure the loan is addressed in your Will, and your estate is structured in a way to ensure that who you want to benefit from these assets after your death, ultimately will.
Getting independent advice is critical whenever anyone is making significant decisions about their most valuable assets, their retirement plan, or even if they are at a stage in their life where they are transitioning to aged care. There are a lot of financial and legal factors that can be easily overlooked. Getting the right advice makes sure you are covering all your bases and that you are making informed decisions that suit your needs now, and into the future.
Never make a hasty decision without getting advice from professionals who are experienced in this area. Although the benefits of a reverse mortgage are certainly attractive and can support older Australians in living a more comfortable life when they reach retirement, it is a big decision that should not be taken lightly. We strongly recommend you discuss any plans to obtain a reverse mortgage loan with your family, obtain legal advice, and consult your accountant or financial planner before committing to such a loan. There may well be other options available to you.
Attwood Marshall Lawyers – supporting people through every stage of life
Making decisions about the family home and planning for retirement can be an overwhelming task. If you are armed with all the information that you need and receive the right advice, you can have confidence in securing the future you want for yourself.
Attwood Marshall Lawyers have a dedicated team of lawyers who practice exclusively in property law and can help people navigate the decisions they are making about their property, whilst providing advice about how this can impact their future, such as their estate planning goals.
We are passionate about ensuring people make informed decisions so that they have peace of mind. If you would like to discuss your unique situation, contact our Property & Commercial Department Manager, Jess Kimpton, on direct line 07 5506 8214, email email@example.com, or free call 1800 621 071.
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