Reverse mortgages advice for seniors
Reverse mortgages allow you to use the equity in your home to obtain money by way of a loan. Interest is charged as fixed or variable and there are fees and charges, just like any other loan, except you don't have to make repayments while you live in your home. No repayments are necessary until you sell your home, move out permanently, default on the loan or die. Because of this, reverse mortgages can be attractive to people who have built up equity in their home but who don’t have enough income to pay off a normal loan.
The loan is often between 10-45 per cent of the home's value. Reverse mortgages may be obtained for many reasons, for example, holidays, a new car or renovations. The money can be paid in instalments, as a lump sum or as a line of credit.
What can go wrong?
Reverse mortgages have advantages but they are complex and there are potential pitfalls you need to consider. For example, a reverse mortgage may impact on your eligibility for a pension.
The debt can rise quickly as the interest compounds over the term of the loan. Equity is steadily eroded. A large proportion, or all, of the proceeds from the sale of your home may be required to pay off the loan. You may end up with not enough money left for aged care or other future needs.
Some reverse mortgages have wide-ranging default clauses. If you are in breach of one of these clauses, the lender can charge expenses (which could be at a higher interest rate) or ask for repayment of the loan. You may have to sell your home if you cannot repay the amount owed. Default clauses can include not maintaining insurance, not paying rates, or doing something that decreases the home’s value. In a worst-case scenario, you could find yourself evicted, your house sold, and still owing money.
If you are the sole owner and someone lives with you, that person may not be able to stay in the home if you move into aged care or die. Some contracts protect the right of a resident who isn’t a borrower to stay in the house after the borrower/s have died.
If the debt increases so it exceeds the home value, you are said to have 'negative equity’ in your property. The terms of the loan contract can be arranged so that the debt cannot exceed the value of the home. This is called a ‘no negative equity guarantee' (NNEG).
You can buy ‘equity protection’ which quarantines a proportion of the property value once the house is sold. Another option is being able to transfer the loan to another property if you move house.
Members of the Senior Australians Equity Release Association of Lenders (SEQUAL) must offer reverse mortgages that have a NNEG. Call (02) 9858 1179 or visit their website for a list lenders who are members of SEQUAL.
The Australian Securities Investment Commission’s MoneySmart website has a reverse mortgage calculator.
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