How does reverse mortgaging your house work?

Key points:

• A reverse mortgage can assist you with funding for things like aged care
• You don’t have to pay your reverse mortgage until you sell your house
• Centrelink or a financial advisor can provide you with impartial advice around whether a reverse mortgage is right for you

Reverse mortgages, or equity release loans, are generally available to residential property owners over 60 years of age, and they allow a person to release funds using the equity in their house.

These funds can then be used as an income stream, or to borrow against, for personal lifestyle needs such as travel, home improvements, medical bills or to pay for aged care services or accommodation payments.

How do reverse mortgages work?

While a traditional mortgage requires a person to make payments on the home loan, payments on a reverse mortgage loan are only due when a person decides to sell, leave the home or in the event of their death.

When their home is eventually sold, they can pay back the amount of the loan as well as the interest owing. No income is needed to qualify for reverse mortgage loans and no regular repayments are required.

The interest is ‘capitalised’, added on to the loan account, and the debt is repaid when property is sold later or when the last surviving borrower dies.

Funding aged care

There are a number of advantages in using a reverse mortgage to fund an accommodation payment.

• You are able to retain your family home, this can be particularly important if the spouse of the person entering care wishes to continue living in the home.
• Ability to pay quickly, saving substantial interest charges to the aged care facility as, generally, the interest charged on the loan will be lower than that charged by the aged care facility.
• It is also possible to pay an accommodation payment in part (or full) via a periodic payment to the aged care facility. Although the interest charged may be more expensive, there are considerable cash flow benefits.

Some downsides to a reverse mortgage include:

• There will be increases to your loan and fees over the period of time before you sell your home, as well as decreases in equity
• This loan may impact whether you can receive the age pension
• In some cases, the interest rate on the loan may be higher than a normal home loan
• If your family decides to keep the home, then they will have to repay the left over balance of the mortgage
• Your heirs won’t have this physical asset after you pass

You should always talk to an expert before making a big decision like a reverse mortgage.

Am I eligible?

In order to secure a reverse mortgage home loan, you must first meet specific requirements.

Most lenders will not offer a reverse mortgage until you are 65 years or older but, generally, you must be at least 60 years of age and using the home as your primary residence and must not be renting out the home.

Choosing the right loan

It is important to choose the right reverse mortgage home loan which is most appropriate for you.

Seeking impartial advice from Centrelink and a financial planner will help you to consider all of your options and ensure that the accommodation payment is structured to avoid any unnecessary reduction in pension.

The lender you are considering for your loan should make you understand how your reverse mortgage is predicted to change in the future, for example, its projections or the impact on your equity. A copy of this information should be made available to you prior to making a decision so you can discuss it further with your family or your financial advisor.

It is also recommended that you consult family members before determining whether a reverse mortgage loan is right for you.

How much can I borrow?

Depending on your age and the lender, you may borrow from 15 percent to 40 percent of the value of your home. Generally, the older you are, the more you can borrow.

Protect your future

It is recommended you look for equity deals that come with ‘no negative equity’ to protect you from owing more than the net value of your property, therefore, it is important to ensure you do not borrow too much money.

Disclaimer: The information above is general in nature and does not constitute legal or financial advice. Readers should seek their own personal legal and financial advice from a suitably qualified practitioner.

How are you planning to pay for aged care? Tell us in the comments below.

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