What is a reverse mortgage?
If you are aged 60 or over, a reverse mortgage is a way of freeing up some cash from the equity that you have in your home. In a reverse mortgage, you still own your house but the bank lends you a small portion of the house’s value money in a lump sum or income stream, using the house as security. A reverse mortgage is a credit product type of equity release product (ERP), where your loan is based on how much you own of your home (the equity).
Some common features of a reverse mortgage include:
|You still own it!||You continue to be the owner of your property.|
|No requirement to pay it back||There is no requirement to repay either capital or interest on the reverse mortgage during the time that you live in the property.|
|Interest is charged on the loan, at a rate that is generally around 1% higher than a standard home loan.|
|Protection||The Government’s 2012 consumer credit reforms included a protection against negative equity in reverse mortgages.|
|Borrow more as you age||As your age increases, so does the proportion of your home’s value that you can borrow.|
|When you move out …||Like a standard mortgage, when you move out the loan (including interest and fees) will need to be repaid, generally from the sale proceeds of the house.|
Why do retirees take out a reverse mortgage?
Deloitte’s 2013 report found the main reasons why older Australians were choosing to utilise a reverse mortgage included the following:
- Regular income source: 1 in 2
- Debt repayment: 1 in 3
- Home improvement: 1 in 7
Reverse mortgage FAQs
Some commonly-asked reverse mortgage questions include the following:
Q: Do you still own your own home?
A: Yes. You remain the legal owner of your home at all times, and there are several legislative protections of this right under the National Consumer Credit Protection Code 2012 (NCCP) and ASIC Regulatory Guide 209 (Credit Licensing: Responsible Lending Conduct). These regulations include the following protections for borrowers:
- Negative equity protection: You cannot go into negative equity, meaning you cannot owe the bank more than a certain percentage the value of your home, and the bank cannot require you to repay more than the value of your home (with a few exceptions).
- Maximum LVR: You cannot borrow more than a certain percentage of the value of your home; this is the loan-to-valuation ratio (LVR). This is so that you have adequate capital left over if you need it. The amount you can borrow depends on your age and the value of your home. As you grow older, you are able to borrow up to a higher LVR. As a general guide, 60-year-olds may be able to borrow around 20%, while 70-year-olds may be able to borrow around 30%.
- Legal advice: You are required to get independent legal and financial advice before signing up for a reverse mortgage.
- Protected equity: Some reverse mortgage products let you specify a certain percentage of protected equity – a portion of your home’s value that you would like to remain available for your estate or for paying the bond for residential aged care at some point. If you choose this option, your reverse mortgage balance could only ever reach a certain amount.
- Equity and cost projections: ASIC requires that before granting you a reverse mortgage, your credit provider must talk you through the projections of how your loan will grow over time with interest and your home equity will change. Your provider must do this in person, using the ASIC MoneySmart reverse mortgage calculator, and you must receive a printed copy to take away with you.
- Information statement: ASIC requires your credit provider to give you an information statement explaining how a reverse mortgage works, how costs are calculated, what to consider before making your decision, and who to contact for more information.
Q: Will a reverse mortgage affect my age pension?
A: Yes. Reverse mortgages can have an effect on your Age Pension entitlements so if you are on the pension, you should speak with a Department of Human Services Financial Information Service officer before signing up for a reverse mortgage. You can visit an FIS officer in person at your local Centrelink office or call Centrelink on 132 300.
Q: Do I have to make repayments on a reverse mortgage?
A: The repayments on a reverse mortgage are not like in a standard mortgage. In a reverse mortgage, the interest repayments just get added to the balance of the loan and you don’t need to pay the bank any money. The loan is only repaid when you sell your house, move into residential aged care, or pass away.
You can make repayments any time you want to and have enough savings to be able to, but it’s not necessary. You might make repayments if you wanted to be able to pass on a larger portion of the sale price of your house in your will.
Q: What happens when I want to move out of the house?
A: If you want to move out of the home your have a reverse mortgage on, or if you pass away, the loan, plus interest and fees, needs to be paid in full. Generally this will come out of the sale price of the property. You (or your estate, if you have passed away) will then receive the balance between the value of the home and the amount owing to the bank. This is similar to the way a standard mortgage works.
Q: What if my partner dies but I still want to live in the house?
A: If you were joint property owners, the reverse mortgage should have been written to take account of this and should continue on. However if you did not own the property at all this might not be the case. You will need to speak with the product provider.
What to look for in a reverse mortgage
When we rated reverse mortgages in early 2017, the interest rates on offer for reverse mortgages ranged from 6.19% to 6.37%, with an average rate of 6.25%.
There are also varying fees charged on a reverse mortgage, much as there are for a standard home loan. The average fees in 2015 were as follows:
- Upfront fees: $872.50
- Annualised ongoing fee: $77.65
- Discharge fees: $367.00
Different providers offer varying levels of value when it comes to the features attached to their reverse mortgages. In our research ratings, CANSTAR assesses reverse mortgages for how they provide value through features including:
- Terms of the loan: What is the minimum loan amount? What equity amount is protected from the lender (LVR)? Is there a protected equity option?
- Product functionality: Can you attach a mortgage offset account to the loan? Is there a redraw facility? Can you make additional repayments if you wish? Can you have a split loan?
- Default: What events may constitute a loan default? What action will lenders take if the borrower is in default?
- Loan application and approval: How easy is the loan application and approval process?
Mrs Amelia Birch has just celebrated her 75th birthday and has been thinking of reassessing her finances.
She had a small amount in superannuation when she and her husband retired, but after a holiday to the pyramids in Egypt she had used most of it up before turning 70, and her husband has now passed away. It occurs to Mrs Birch that she had been looking forward to making another trip to visit her daughter, who is a missionary in Peru, but she may not be able to afford it on the Age Pension alone.
Mrs Birch does most of her banking on her home computer now that she finds it more tiring to visit a branch. She hops on the computer and uses CANSTAR’s website to research reverse mortgages and how she might be able to use some of her home equity to fund the rest of her retirement. She makes some notes, then phones her financial advisor to set up an appointment to talk over her options.
Mrs Birch asks her financial advisor about how a reverse mortgage product might work in her personal situation.