Reverse Mortgages in Australia

A reverse mortgage allows you to borrow money against your home, without having to make regular repayments. Reverse mortgages have been promoted as a means of giving older home-owners access to extra cash. The amount of money borrowed and the interest accrued over the term of the loan are payable when the property is sold or when the last co-borrower moves out or dies. This type of loan can increase financial flexibility considerably but can also have important long-term effects on future choices.

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Reverse Mortgages allow the 'cash poor, asset rich' to create a cash flow out of the equity built up in their home, without having to sell it. The beauty of the arrangement is that you can generate money to live on and still remain in your house.

Unlike a normal loan, you don't have to make any repayments until you sell, move out of the home or die. The total amount you owe must then be paid back to the bank, usually from the sale of the house. Your debt will be considerably higher than the original amount you borrowed, as each year the fees and interest are added to the loan.

If you are a joint owner of the house, the loan will be in both names and will continue as long as one owner lives in the house.

The amount you can borrow is calculated on your age and the value of your home. These loans are intended to allow some residual value in the property at the termination of the loan. However, this is dependent on a number of factors, including the number of years the loan remains in force, the amount you borrowed and the growth in value of your home.

The lender may periodically re-assess your home to ensure that its condition has not deteriorated and that the loan has not exceeded the value of the property. You will be kept up to date with the state of your loan via regular statements.

While historical data and trends indicate that your property is likely to continue increasing in value for the life of your loan, this is not a certainty. Nor are you likely to be able to predict how long you will live in your home. There is a possibility that the loan could eventually equal or exceed its value. If this happens, the lender may then ask you to commence repayment.

Advantages

(i) You can continue to live in your own home and have cash for a worthwhile purpose such as repairs to the house, a new car, a holiday or as a supplement to your income.

(ii) You don't need to make any repayments on the loan while you live there.

(iii) Although the loan is usually taken as a lump sum, some lenders offer regular payments or a combination of both.

(iv) Lenders will protect your home's equity from being completely eroded in that they limit the amount of equity available to you to be drawn out as a Reverse Mortgage. Most lenders only let borrowers access 40% or less of the available equity in their home

Disadvantages

(i) The loan rate is often higher than the standard home loan rate.

(ii) Fees and interest charged on the loan (compound interest) will accrue throughout the term of the loan. It is highly probable that the amount you owe could double in less than 10 years and the lender may end up owning a large part of your house.

(iii) The value of your estate will be considerably reduced for those who will inherit your estate.

(iv) If you relocate (either by choice or necessity) the loan must be repaid at that time. This could limit your options, as you may be left with limited money after the sale of your house.

(v) If you are the sole owner of the house and you relocate or die, anyone else who lives with you may not be able to stay in the home.

(vi) If you want to repay the entire loan early you may have to pay an early termination fee. These fees can be considerable.

(vii) The loan may affect on your eligibility for age pension payments from Centrelink.

(viii) You must be at least 60 years old to qualify.

What are the Alternatives to a Reverse Mortgage?
A great alternative to a Reverse Mortgage is a Line of Credit or an Equity loan secured by the equity the borrower holds in his property. Even if you are a Pensioner, Unemployed or receive a very small amount of income you may still be able to obtain an Equity loan from your home.

Asset Based lending will allow a borrower to obtain access to funds available as equity in their property without the income qualification restrictions imposed by traditional lenders and without the age-based restrictions imposed by Reverse Mortgage lenders.

I am referring of course to what is commonly known as a NO-DOC Line of Credit.

Advantages of a NO DOC Line of Credit

(i) Interest rate applied to your loan will be lower than that applicable to a Reverse Mortgage;

(ii) No Age restrictions apply;

(iii) No income restrictions Apply

(iv) You are able to draw more money out of your equity than you would as a Reverse Mortgage.

Disadvantages of a NO DOC Line of Credit

(i) The full control is passed on to the borrower. Unless you are very careful with how you spend the funds you obtain from the equity in your home - you may lose your house. For example, if your home is worth $250,000 and is fully paid off. You may borrow $150,000 and spend it on lifestyle, cars, holidays, entertainment etc. Eventually you may find yourself with a debt of $150,000 and no income to repay the debt from.

(ii) The value of your estate may be eroded unless the moneys borrowed are invested further into growth assets.