Reverse mortgages - know the pros and cons
CoreLogic data shows Australia’s median capital city home value has jumped from $605,000 in February 2017 to $801,000 today. That’s an extra $200,000 in home equity in the pockets of home owners. And for cash-strapped seniors, a reverse mortgage offers a way to access this money without having to sell their home.
Reverse mortgages are a type of loan typically available from age 60, with age-based limits around how much you can borrow. For example, a 60-year-old may be able to borrow 20% of their home’s value, a figure that can rise to about 35% for an 80-year-old.
The beauty of a reverse mortgage is that no monthly repayments are required. The loan is repaid when you sell your home or pass away, and in the meantime, the funds drawdown can provide an income boost or help pay for major bills like home repairs or medical procedures.
Along with the positives, there are downsides that seniors need to be aware of. In particular, reverse mortgages charge interest well above traditional home loan rates. As a guide, Heartland Reverse Mortgages has a current standard rate of 5.6%. G & C Mutual Bank charges 5.22%.
The interest cost compounds over time – something to be mindful of if you take out a reverse mortgage at a younger age. By law, you can’t end up with negative equity – where you owe more than your home is worth. However, the loan plus accumulated interest will eat into the sale proceeds of your home if you sell up at a later stage, possibly to fund aged care accommodation.
A more immediate issue is how you access the cash from a reverse mortgage. Loan payments can be taken as a lump sum or a series of regular payments, or both. The choice you make can impact age pension entitlements, so it’s an area that warrants professional advice.
An alternative to a reverse mortgage is Centrelink’s Home Equity Access Scheme, formerly known as the Pension Loans Scheme. It also lets you access home equity but only through fortnightly payments – no lumps sums, and the combined loan plus pension payment is capped at 1.5 times your maximum pension rate.
There are also maximum loan limits depending on your age and the value of your home. Once the maximum is reached, the payments stop altogether but interest – currently set at 3.95%, continues to apply.
The upshot is that home equity can be a useful resource in retirement. But do think this option through carefully. Once you’ve exhausted home equity there may be few choices left to fund your retirement – and looking ahead, your aged care needs
Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.