A reverse mortgage can potentially provide a significant improvement to your income and lifestyle during retirement, but as with any financial product, it doesn’t give you free money. Canstar’s research team weighed up the cost of the average reverse mortgage over 10, 20, and 30 years.
What does a reverse mortgage cost?
The following costs are involved in purchasing a reverse mortgage:
- Upfront Fees: Upfront fees include things such as the application fee, settlement fee, documentation fee, and legal fee.
- Ongoing Fees: Any other yearly, monthly, or fortnightly fees.
- Interest Rates: Compound interest is charged on the principal of the loan each year.
Canstar’s recent Reverse Mortgage research found average upfront fees of $872.50, average ongoing fees of $77.65, and an average variable interest rate of 6.25% p.a..
Using the example of a $90,000 loan amount, and assuming that all fees are capitalised and are repaid at the end of the loan term, a typical reverse mortgage could cost the following:
Cost of average reverse mortgage over time
|10 Year Loan||20 Year Loan||30 Year Loan|
|Average Interest Paid||$82,175||$242,116||$547,110|
|Average Fees Paid||$9,608||$17,315||$25,021|
|Average Total Cost (including principal)||$181,783||$349,431||$662,131|
Source: www.canstar.com.au, 2017.
All of the fees are capitalised and are repaid at the end of the loan term.
Based on a $90,000 loan amount and 15% LVR. Rounded to the nearest dollar. Total Cost includes the repayment of the principal that has been borrowed.
Keep in mind, of course, that this calculation is based on current interest rates. If rates were to increase in the future, the lifetime costs of the loan would increase as well.
To get an idea of how much a standard home loan will cost you over time, try out our Home Loan Repayments Calculator.
The good news: Limits on costs
The first piece of good news is that some reverse mortgage products allow you to protect a certain portion of the value of your home with a protected equity option. You might want to make sure there’s $300,000 of home value left to leave to your family in your will, for example, or to pay the bond for residential aged care if you need it.
If you choose this option, your reverse mortgage balance could only ever reach a certain amount. You can use the ASIC MoneySmart reverse mortgage calculator to see how different levels of protection would affect your reverse mortgage.
The other good news is that there are many legal requirements in place to protect you as a borrower.
For starters, legislation states that you cannot go into negative equity. Your debt cannot grow to an amount greater than the market value of your home – so you cannot end up in more debt than you could repay by selling your home.
Also, your mortgage provider must help you to understand all of the costs before you sign up, so that you can plan for your retirement. From 1 March 2013, ASIC requires your credit provider to go through reverse mortgage projections with you in person, before you take out a reverse mortgage. They must:
- Show how your home equity will change over time.
- Show how interest rates will grow your debt over time.
- Use the ASIC MoneySmart reverse mortgage calculator to illustrate these projections.
- Give you a printed copy of these projections to take away with you, so that you can make an informed decision about whether or not to purchase a reverse mortgage product.
Different providers allow you to borrow different amounts using their reverse mortgage products, so ensure that you do your homework carefully.