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Lifetime loan

10 Apr 2013

Wondering what a reverse mortgage is and how it can help you? Look no further.

What is a reverse mortgage?

A reverse mortgage is a loan taken out against the equity in your property. One person on the property title must be 65 years old or older and the other, if there is one, must be older than 60.

A reverse mortgage, which is also referred to as a lifetime loan, allows you to borrow money against the asset value in your home, holiday home or investment property.

You can make voluntary repayments if you wish, however usually once you pass away or sell your home, the loan will be repaid by the estate.

Why take out a reverse mortgage?

A reverse mortgage can be a way to ensure your quality of life in retirement. No income is required to qualify and you can choose to take a loan as a lump sum, a regular income stream, a line of credit or a combination of the three options.

The home holds a lot of the personal wealth of the majority of people aged over the age of 65.

Choosing to take out a reverse mortgage rather than downsizing can have benefits. If the value of your home increases at a greater rate than the interest and fees over the life of your loan, your estate will have more money in its grasp when it needs to pay back the loan. Plus, if you downsize and put any excess money in the bank, you’ll pay tax on it. If you stay put, your money is safely stored in the value of the property.

The risks

All mortgages have costs. Reverse mortgage fees, which include the interest rate, loan origination fee, insurance fee, appraisal fee and various others, are extremely high when compared to traditional mortgage fees. However, the costs are not paid out of your pocket initially, they’re rolled into the loan and paid as and when the loan is.

Another risk involves downsizing. If you downsize, you’ll have to pay back the loan so it’s important to keep that in mind when choosing the kind of home you plan to move to. Always ensure you’ll have enough excess money to pay back the loan.

Lastly, the reverse mortgage is paid back on your death. This means that any heirs to your estate will not have access to as much as they may have previously thought, as the repayment will decrease the equity in your home.

Common concerns

Many people believe that when you take out a reverse mortgage, the lender takes ownership of the home. In fact, you retain ownership. The property is only used as a guarantee for the repayment.

Another question that many people ask is the amount that you can take out against your home. You cannot take out a loan that exceeds the value of your property. It’s a non-recourse loan so you or your heirs will never owe more than the value of the home once the loan matures.

How much to borrow

Different lenders will have different policies about how much you will be allowed to borrow from them but generally, the older you are the more you can borrow.

MoneySmart, the website set up by ASIC, gives a general guide for the maximum amount you can borrow. If you’re 60, the amount is estimated at 15-20 per cent of the value of your home. The amount usually increases about one per cent for every year over 60. This means that if you’re 70, the loan amount is estimated at about 25-30 per cent of the value of your home.

Now what?

Like anything financial, you should always consult an expert. As with any loan, there are fees involved and this will depend on the lender so it’s important to ask all of your questions before you choose to do anything.

Always ask whether the loan will impact your pension eligibility and what the interest rates are so you’re fully prepared. Lastly, remember to read the terms and conditions closely.

MoneySmart is a great stating point for any questions or concerns you may have. Have further queries? Speak to you lender.