A reverse mortgage is a form of home equity release and offers a way of turning the value of your property into liquid cash. You can receive payments and retain the title deeds and live in your house, and eventually, your lender will own a proportion of the property.
How Does A Reverse Mortgage Work?
Your lenders ascertain the value of your property and give you a loan against this overall figure. The amount you receive depends on how much you request, how much your home is worth, your age, and how much will likely be paid in interest.
In accessing the equity in your home, you’re agreeing to your lender owning a proportion of the overall value of your property, but overall, you own the property. Over time, interest will be compounded with the amount of money you have borrowed.
As long as you live in the home, you don’t have to pay the money back until you move out of the property and it’s sold on, whether this is by you or by your estate after you are deceased. Alternatively, you can make voluntary repayments if you decide to reduce the amount you owe the lender.
How Does The Reverse Mortgage Loan Application Process Work?
You’ll need to browse lenders and compare reverse mortgages to find something that works for you (making sure you only look at companies with an Australian credit licence). Then you need to make your application.
Next, you’ll need to supply supporting documents such as identification. Even if you apply online, you’ll need to answer a compliance call from your lender to check you understand the terms and are making the application of your own free will.
Then, your property will be valued, and contracts will be drawn up, which you will want to show to your solicitor for legal advice. Then, finally, it’ll be time for the loan settlement.
The disbursement of funds can take any number of shapes. For example, you could take a lump sum, utilise it as a line of credit, or receive regular payments.
As with any property-based loan, the process is made much easier when you bring in the professionals to look for a reverse mortgage loan broker or someone specialising in equity release.
How Much Interest Is Charged On Reverse Mortgages?
There are some additional costs you will have to bear for your reverse mortgage.
- Interest: You will be charged a percentage of interest on your reverse mortgage payments, which will compounded periodically- generally compounded monthly . The loan increases over time.
- Fees and charges: You also need to set aside money for fees. The first fee is the origination, which is essentially the lender processing fee, and then the initial mortgage insurance premium.
- Homeowners insurance: You’ll still need to continue to pay homeowners insurance and any potential property taxes and fees.
The final fees are those associated with the estate agents and occur during the sale of the property.
| Year | Loan Balance | Interest Charged (9.5%) | Loan Balance End |
| 1 | $Â Â Â Â Â Â 250,000 | $Â Â Â Â Â Â 24,812 | $Â Â Â Â Â Â 274,812 |
| 2 | $Â Â Â Â Â Â 274,812 | $Â Â Â Â Â Â 27,274 | $Â Â Â Â Â Â 302,086 |
| 3 | $Â Â Â Â Â Â 302,086 | $Â Â Â Â Â Â 29,981 | $Â Â Â Â Â Â 332,067 |
| 4 | $Â Â Â Â Â Â 332,067 | $Â Â Â Â Â Â 32,957 | $Â Â Â Â Â Â 365,024 |
| 5 | $Â Â Â Â Â Â 365,024 | $Â Â Â Â Â Â 36,228 | $Â Â Â Â Â Â 401,252 |
| 6 | $Â Â Â Â Â Â 401,252 | $Â Â Â Â Â Â 39,823 | $Â Â Â Â Â Â 441,075 |
| 7 | $Â Â Â Â Â Â 441,075 | $Â Â Â Â Â Â 43,776 | $Â Â Â Â Â Â 484,851 |
| 8 | $Â Â Â Â Â Â 484,851 | $Â Â Â Â Â Â 48,120 | $Â Â Â Â Â Â 532,971 |
| 9 | $Â Â Â Â Â Â 532,971 | $Â Â Â Â Â Â 52,896 | $Â Â Â Â Â Â 585,867 |
| 10 | $Â Â Â Â Â Â 585,867 | $Â Â Â Â Â Â 58,146 | $Â Â Â Â Â Â 644,013 |
* The data in this table above is based on my own personal experiences as a licensed and accredited mortgage broker, from having serviced 1000s of mortgages over the last 10Â years. PLEASE ONLY USE THIS AS A BASIC GUIDE AND EXAMPLE
Based on my 10 years of experience in the industry, one important things I note to my clients is, the longer the loan term you seek, the more and higher amount of interest you will accrue on a yearly basis due to your loan being compounded on a monthly basis as shown above if you were to draw down and use on ALL your available funds straight away.
However for the above scenario, in most cases clients draw down on these funds slowly on a periodic basis as the Reverse Mortgage is to help with living expenses.
How Do Loan Repayments Work For Reverse Mortgages?
The loan is only due to be repaid on the sale of the house or when you or the last co-borrower leaves the property for twelve consecutive months. This could be because you have moved into a nursing or care home or because it has been sold posthumously by your estate.
The loan is then repaid in one go by the proceeds from the sale of the property. It doesn’t require regular repayments like a mortgage.
However there are products out on the market that allows you to pay the loan down so you can retain more equity when you pay out the loan, this is generally common when you’re still working but require a reverse mortgage for other uses.
Who Pays Off A Reverse Mortgage?
A reverse mortgage can either be paid off by you or by your estate after you are deceased. It’s paid for by the sale of the property you have borrowed against.
If you take out a reverse mortgage with another person, say a partner, it will need to be paid back when the final co-borrower vacates the property.
Who Is Eligible For A Reverse Mortgage?
There are two criteria that you will need to fulfil in order to apply for a reverse mortgage successfully.
- Depending on a lender’s target market determinations, the minimum age to be eligible for a reverse mortgage is 60.
- You will need to either fully own or have a low balance left on your existing mortgage with a substantial amount of equity.
What Are The Tax Implications Of A Reverse Mortgage?
Reverse mortgages in Australia are generally not considered to be taxable as they’re classified as a loan, not an income.
This only changes if you invest the funds elsewhere and get a secondary profit. Then, that sum will be eligible for capital gains tax.
The sale of your primary residence tends not to be eligible for capital gains tax either. If your heirs inherit the property and sell it to pay back the reverse mortgage, they will likely need to pay capital gains tax on the sale.
However we advise you to seek professional advice from an accountant.
What Are The Advantages Of A Reverse Mortgage?
As we grow older, we can find ourselves property-rich but cash-poor. A reverse mortgage can give you a regular income stream to better maintain your current lifestyle without losing your foot on the real estate market.
If you suddenly require money, be it for living expenses or medical expenses, a reverse mortgage can allow you to free up money to pay for these expenses, or you may find your super funds are not stretching enough to fund your retirement fully. Tapping into your home’s equity could make you that much more comfortable.
A reverse mortgage negates the need to downsize and move out of the house you have come to call your home. It allows you peace of mind that you will always have a place to call your own as long as you’re alive.
What Are The Disadvantages Of A Reverse Mortgage?
All loans come with pros and cons. Some of the downsides to a reverse mortgage are the following:
Reduces Inheritance
It reduces the amount of inheritance you’re able to leave behind for your children since they will likely need to pay back the lender with the proceeds of the property sale.
Negative Equity
You could potentially find yourself in negative equity. This would be if your house loses value after you take out the loan and you end up owing more than can be recouped by the property sale.
However, most loan products are covered by negative equity protection to avoid you owing more than the initial valuation of the property. The worst-case scenario is that nothing is left over at the end.
Cannot Use Leverage For The Property
You won’t personally be able to access the full value of your home or leverage it to invest in other assets, such as a new property investment. This is partially because of interest, the fees you have to pay from start to finish, and the reverse mortgage terms and conditions.
Age Pension Subject To The Assets Test
Your entitlement to your aged pension could be affected if you take the money as a lump sum and use it to purchase a significant asset, as it will be subject to the assets test for eligibility.
If you take regular withdrawals of your reverse mortgage to support your lifestyle, it’s unlikely to affect your Age Pension.
Higher Interest Rates
Reverse mortgage interest rates tend to be high, and the compound interest really does build up quickly. Your loan balance could end up quite high.
What Are Some Important Things To Consider?
Some more things you will want to bear in mind when considering a reverse mortgage are the following.
Financial Planning
All sorts of unknowns are thrown up in life, and it can be hard to anticipate needing to pay medical bills or finance aged care.
That said, retirement planning is a good idea. It’s worth trying to anticipate your long-term financial plans and how your reverse mortgage loan will factor into these.
Estate Planning
How much do you want to leave to your family when you’re gone? This factor will influence how much you’re willing to take out on a reverse mortgage loan.
Government Benefits
It’s good to know whether you’re eligible for a government pension and when that will kick in.
You might also be interested in learning about the government’s Home Equity Access Scheme. It is different but has a temptingly low interest rate than many other loans of this kind can’t promise.
Property Value
How much is your property worth? Is it likely to remain stable, or do you run the risk of it decreasing? While the negative equity guarantee offers some protection, you may wish to have some money left for your estate after the sale of the house.
Early Repayment Costs
Another thing that makes this such an attractive loan in Australia is that you don’t have to pay fees for early repayment on reverse mortgage loans.
Ongoing Costs
One of the conditions set forth by most reverse mortgage lenders is that you maintain the property and pay all ongoing fees. Plus, you’ll still need to pay for home insurance.
What Are Some Alternatives To A Reverse Mortgage?
It’s always worth comparing your options. Let’s look at some of the other types of loans that are comparable to the reverse mortgage.
Home Equity Loans
Home equity loans, or second mortgages, can be taken out at any age. These tend to be fixed-term, lump-sum loans taken out against the property’s market value. You repay the loan’s capital and the interest with fixed monthly payments.
The interest rate tends to be lower, and the regular repayments mean compound interest is less of a worry.
Selling Your Home
The most straightforward option overall to free up your cash is to sell your home. You can use the proceeds to downsize to a smaller and more manageable property or put it towards renting somewhere else or care costs.
However, purchasing another property will likely come with taxes like stamp duty. And you can expect all the upheaval that comes with moving.
Summing Up
Understanding the nuances of the reverse mortgage market can be a challenge. For absolute clarity, seeking independent advice from a reverse mortgage broker is a really good idea, as they will be able to analyse your personal situation and determine the best options that are available to you.
Are you looking for a reverse mortgage broker? Contact The Mortgage Agency today to speak to one of our mortgage brokers who specialises in reverse mortgages.
If you’re looking to find out more information about getting a home loan, mortgage or property investing, then check out our useful resources:
- What happens when you pay off your mortgage?
- How to use super to buy property?
- A guide to Australia’s Home Guarantee Schemes.
- Can you salary sacrifice your mortgage?
- The ultimate guide to property investment.
- Borrowing power: How much can I borrow for my mortgage?
- How to get a low-income home loan?
- Use our home loan offset calculator.
Book in your free reverse mortgage discovery session now.
Frequently Asked Questions
Can My Dependents Live With Me If I Have A Reverse Mortgage Out On My Property?
You can have others living in your home with you in a property with a reverse mortgage against it, but when you leave the property, it needs to be sold, regardless of whether or not your dependents want to remain there.
Can I Take Out A Reverse Mortgage With My Spouse?
You can potentially take out a reverse mortgage with a partner who cohabits and co-owns the property with you. The loan would then need to be paid back when the last person whose name is on the mortgage moves out.
Can I Take A Reverse Mortgage Out On A Second Property?
The simple answer is no. The main reason for a reverse mortgage is to ensure your continued home ownership. A property with a reverse mortgage on it should be your primary residence. If you and any co-borrowers are absent from a property for 12 months or more, the sale can be forced.
How Much Will I Likely Be Able To Borrow On A Reverse Mortgage?
The amount you can borrow depends on your age and what your home is worth.
The general rule of thumb most providers follow is that if you borrow aged 60, the maximum loan amount will be between 15-20% of the value of the property, with this generally going up by 1% for every year over 60.
Can Reverse Mortgages Be Used Instead Of Construction Loans?
Yes, you can use your reverse mortgage to finance improvements and enhancements to your house as a form of construction loan. However, there may be some restrictions on what you can and cannot do.
As you grow older, you may find you need some strategic modifications to remain comfortable living in your home. For example, rails, stairlifts and bars don’t come cheaply, so a reverse mortgage could make your home that much safer.
