Reverse Mortgages

Like many people, you may have prioritised investment in your own home rather than other investment options such as superannuation and you may reach your retirement years asset-rich but cash-poor. Reverse Mortgages, also known as Home Equity Loans or Equity Release Loans are a way by which you can convert some of the equity tied up in your home into cash. You can use the money for example to buy a new car, go on a trip or even carry out renovations to your home. This form of loan allows you to retain your financial independence without having to sell up and move!


How do they work?

Reverse Mortgages act in the opposite way to conventional home loans. No repayments are required during the loan term and instead of the loan diminishing over the term of the loan due to repayments, interest is applied to the loan and therefore the loan increases over the passage of time. The lender allows you to stay in your home until you sell it, vacate the property or die. In the event of your death, the interest, fees and charges are paid from the estate.

If your home is jointly owned the reverse mortgage would be in both names so your home is protected as long as one of you is alive. However if the home is only owned in one name, the reverse mortgage would be just in that name and therefore the mortgage would have to be repaid upon the death of that person; this is important to note as you may unwittingly leave your partner homeless in this scenario.

You may take the loan as either a lump sum or as regular monthly payments.


How much can you borrow?

A reverse mortgage on your property is available to people over the age of 60 who own their own homes with the amount you can borrow dependent on your age. The older you are, the more you can borrow with some lenders lending as much as 50% of the home’s value to a 95 year old and 15% of the home’s value to a 60 year old.



Reverse mortgages, whilst giving you financial independence now, may limit your options in the future, for example:


*          if you decide to sell and move to a retirement village you may not have enough equity left in your property to be able to afford to do this,

*          the value of your estate may be much less than anticipated due to the growing debt that needs to be repaid, and

*          the loan may have an impact on your eligibility for Centrelink benefits particularly if you take it as a lump payment.


Case Study:

Bob is a pensioner living in his own home. For Bob to continue living in his home he needs to carry out considerable repairs to the property but Bob does not have cash available to do so. To overcome this dilemma, Bob enters into a Reverse Mortgage and borrows $100,000 (20% of home value). Whilst this appears to be an easy fix to the situation, Bob needs to be mindful that at a fixed interest rate of 8.95% the loan will have more than tripled in size within 15 years whilst the equity in the property may or may not have increased at the same rate.

As with all financial decisions there are advantages and disadvantages. Before entering into a Reverse Mortgage you should seek the advice of your accountant or financial advisor or if you receive any government Income Support, talk to Centrelink.

Our advice is of a legal nature. If you would like to discuss these matters further please call us on 9744 0722 or email today.