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.
Frequently Asked Questions about this Article…
A reverse mortgage is a type of loan available to seniors, typically from age 60, allowing them to access their home equity without selling their home. It can provide an income boost or help cover major expenses like home repairs or medical bills, with no monthly repayments required.
The amount you can borrow with a reverse mortgage depends on your age and the value of your home. For instance, a 60-year-old might borrow up to 20% of their home's value, while an 80-year-old could access up to 35%.
Interest rates for reverse mortgages are generally higher than traditional home loans. For example, Heartland Reverse Mortgages offers a rate of 5.6%, while G & C Mutual Bank charges 5.22%.
With a reverse mortgage, no monthly repayments are required. The loan is repaid when you sell your home or pass away. However, interest compounds over time, which can reduce the sale proceeds of your home.
The way you choose to access funds from a reverse mortgage—whether as a lump sum, regular payments, or both—can impact your age pension entitlements. It's advisable to seek professional advice to understand the implications.
The Centrelink Home Equity Access Scheme, formerly the Pension Loans Scheme, allows you to access home equity through fortnightly payments. It has a lower interest rate of 3.95% but does not offer lump sum payments.
Yes, while reverse mortgages provide financial flexibility, they come with risks such as higher interest rates and the potential to reduce the proceeds from your home's sale. It's important to consider these factors carefully.
Before taking out a reverse mortgage, consider how it will affect your long-term financial situation, including your retirement and aged care needs. It's crucial to think through this option carefully and seek professional advice.