If you’ve heard the term “reverse mortgage” and you’re wondering what it means, rest assured, it isn’t quite the opposite of a home loan. In fact, a reverse mortgage is actually a type of loan that trades your home equity as security for a line of credit, lump sum payment or ongoing payments. Older Australian homeowners most commonly use them as a form of retirement income.
Of course, there’s a little more to reverse mortgages than that, so let’s break them down.
How does a reverse mortgage work?
In Australia, a reverse mortgage loan is generally used by retirees to help provide a regular income stream and support living expenses or aged care costs, using an amount of equity in their home as security against a loan. This means that you do not have to sell your house to assess the property's value.
Various lenders offer reverse mortgages, but they function differently from conventional home loans.
Unlike a traditional loan, you do not make regular repayments on a reverse mortgage. This allows for an indefinite loan term should you choose to use your reverse mortgage to create an ongoing line of credit or regular income stream. Instead, the outstanding loan amount is due either when the property is sold or when the property owner dies.
You can choose how you would like to receive payments from your reverse mortgage, with the maximum amount generally being 15%-20% of the value of your home for borrowers over the age of 60 and 25% to 30% of the property value for borrowers over the age of 70. Generally, eligibility for reverse mortgages starts at the age of 60.
What does a reverse mortgage cost?
While you will not have to repay the loan balance of a reverse mortgage, there are costs to keep in mind if you are considering this method. These costs include:
- Interest: You will pay interest on a reverse mortgage in the same way as a home loan, but the interest rates on reverse mortgage loans tend to be roughly 2% higher than standard home loan interest rates (according to ASIC). Because there are no repayments, interest also compounds quicker on a reverse mortgage — particularly on lump sum payments.
- Fees: Like with any loan, there can be fees attached to a reverse mortgage, which can be significant, so make sure to factor them into your financial situation. These can include establishment fees, ongoing service fees, valuation fees (charged for calculating your home’s value), and any other fees stated by the lender.
To calculate approximate reverse mortgage costs, you can use the ASIC-developed reverse mortgage calculator.
What is a home loan draw down?
What are alternatives to a reverse mortgage?
There are many reasons you might not want to dive straight into a reverse mortgage, and there are several other options that might suit your financial situation better.
The Home Equity Access Scheme (formerly the Pension Loans Scheme) is an option allowing older Australians access to a voluntary non-taxable loan from the government, with equity in their own home as security on the loan. Currently, interest is charged at 3.95% p.a., significantly lower than the interest rate on the average reverse mortgage, and Home Equity Access Scheme loans must be repaid (not necessarily at the sale of the property, unlike with a reverse mortgage). You can still access the loan amount as a lump sum, fortnightly payment, or some combination.
Another option may be a home reversion. Home reversion is when you sell part of your equity in your home at a discount but continue living there. On the property sale, the home reversion scheme provider will receive the value of the proportion they purchased. This is a potentially risky prospect, as it depends on the market value of your home at its sale. Home reversion schemes are typically only available in Sydney and Melbourne, where the market value of property has traditionally only risen.
A personal loan could also be an option if a lump sum of money is your main priority and may allow you a greater variety of options regarding loan features and interest rates.
While not as appealing in terms of offering access to a new cash reserve, if you do not currently own your own home, you may want to look at a refinance home loan. Refinancing could decrease your home loan repayments. If you have considerable equity in your home, there may be significantly lower variable interest rates on offer for your adjusted loan-to-value ratio (LVR) tier.
