Many Australians could be considered asset-rich but income-poor because the majority of their wealth is tied up in the family home – an asset that doesn’t typically generate income.
For retirees aged 60 and over who are considering downsizing their home to free up capital to use in retirement, a reverse mortgage may allow them to stay in their homes longer, whilst also providing access to capital to help support their lifestyle and living costs.
A reverse mortgage allows you to convert a portion of the value of your home into a cash lump sum, ongoing regular payments or a combination of both these options.
While you continue to live in the home you are not required to make repayments on the capital borrowed, however if you move out, sell or pass away then the loan must be repaid. The amount of money you can borrow will depend on the lender chosen and factors such as your age. Typically the maximum amount a 60 year old could borrow is between 15-20% of the value of the home. This maximum borrowing amount increases as you get older.
Unlike a traditional mortgage which converts income into equity in your home, a reverse mortgage converts the equity into income or a lump sum. Over time the loan balance increases, reducing the equity in your home unless you experience adequate capital growth in the property. The interest charged on the amount borrowed is added to the loan, as are any fees, so the balance of the loan will continue to increase even if you do not borrow any more money. It’s important to recognise the rate at which the loan increases will accelerate year to year due to the compounding of interest.
Reverse mortgages can enable you to remain living in your own home and:
In September 2012, the Government introduced new legislation to protect borrowers by ensuring that at no point can the loan end up more than the value of your home. These changes are referred to as ‘negative equity protection’ to provide peace of mind that in the event your home is sold, the lender only receives the proceeds of the sale and you (or your estate) cannot be held liable for debt in excess of this.
There are a few things that you need to be aware of if you are considering a reverse mortgage and these include:
A reverse mortgage can be a great way to help you remain in your own home longer.
However, as with all loans it is important to seek independent advice before you take out a reverse mortgage to understand what you’re signing up for, the terms and conditions, fees and charges and any penalties that apply.
You can use our Reverse Mortgage Calculator to run some numbers should you be adequately interested.
Going in to debt brings it’s risks, but these risks can be managed with appropriate knowledge and financial management. When considering any strategy, it’s always worth considering and comparing the other options available to you.
Enjoy this short video about ‘educated risk taking’.