A reverse mortgage can be a handy revenue option for those with the equity to do it, being particularly popular among the retired; but if you’re looking into the possibility of taking out a reverse mortgage, you should know the ins and outs of how they work. This includes how much you can borrow using one.
What is a reverse mortgage?
A reverse mortgage is a type of equity release product (ERP) which allows you to borrow against the equity you have in your home. They can be paid either as a lump sum or as a smaller recurring payment, with the latter option being popular among retirees looking to boost their income.
General principles protecting you as a borrower
The amount you can borrow using home equity is limited by government regulations in two main ways:
- You cannot go into negative equity. You cannot borrow more than the value of your home or be required to repay more than the value of your home (with a few exceptions).
- You cannot borrow more than a certain LVR (loan-to-valuation ratio). You can only borrow a certain percentage of the value of your home.
Apart from these two limitations, the amount you can borrow depends on your age and the value of your home.
Looking for a regular home loan? The following table displays a snapshot of principle & interest home loan products rated by Canstar, sorted by advertised interest rate and with links direct to providers’ websites. These results are based on a loan amount of $350,000 in NSW for refinance home loans with an LVR of 80%.
How much can you borrow on a reverse mortgage?
As you grow older, you are able to borrow up to a higher amount. As a general guide, 60-year-olds may be able to borrow around 20% of the value of your property (20% LVR), while 70-year-olds may be able to borrow around 30% (30% LVR).
Different providers allow you to borrow different amounts using their reverse mortgage home loans, and this is what we refer to when we say the “LVR” varies. Do your homework carefully to find the right LVR for you. You could potentially borrow up to 45% of the properties value.
Here’s what Canstar found when we researched the reverse mortgages on offer in Australia in 2016:
|Provider||Maximum LVR for 65-year-olds||Maximum LVR available|
|Heartland Seniors Finance||20%||45%|
|Source: www.canstar.com.au, 2017.|
As you can see, 65-year-olds can only borrow so much in order to ensure that they will be able to draw down further money later if necessary. The maximum amount you can borrow is currently 45%, allowing a significant amount of “buffer” for borrowers who need extra money later on.
Some reverse mortgage products also give you the option to specify further equity protection, if you want to keep a certain percentage of the sale proceeds of your home. You might want to make sure there’s something in your will, or you might want to make sure you can afford the bond for residential aged care if needed.
If you choose this option, your reverse mortgage balance could only ever reach the specified amount of debt.
How much is that in dollars?
Unfortunately, we can’t estimate what house prices will be like at the time when you might be entering a reverse mortgage, especially with a housing boom going on in several areas at the time of writing.
Hypothetically, if a borrower’s house was worth $400,000, an LVR 45% would mean they could borrow up to $180,000 – twice the size of the average reverse mortgage loan. So a borrower in that situation might be able to access quite a comfortable level of income support if they chose to use their home equity.
How much are fees on reverse mortgages?
Canstar’s Reverse Mortgage research from 2017 shows that there are varying fees and charges, just as there are on standard home loans. The average reverse mortgage fees are:
- Upfront fees: $872.50
- Annual fee: $77.65
- Discharge/exit fees: $367
To get an idea of how much you can borrow via a standard home loan, try our Home Loan Borrowing Power Calculator.