As our population ages and more and more people are heading into retirement, funding a decent retirement lifestyle can become difficult, especially if all your wealth is tied up in your family home.
For this reason, many retirees are now looking at reverse mortgages to help them achieve a better lifestyle in retirement and to allow them to do some of the things they couldn't do while they were still working.
This could include doing some much needed home improvements to make life a little easier as the occupants continue to age, going on a well deserved holiday or updating their current car to one which is more reliable and requires less maintenance.
So What Is A Reverse Mortgage?
Put simply, a reverse mortgage allows you to borrow against the equity in your home to access available cash. This loan can be taken as a lump sum or can be drawn down as regular payments depending on what your needs are.
A reverse mortgage does not require you to make any repayments as the loan will be paid out when the home is eventually sold, when you move into aged care or when you die. The title of your home remains in your name and you can continue to live in the home for as long as you want.
So let's look at some of the pros and cons of taking out a reverse mortgage on your home.
- You can access the equity in your home as available cash for many worthwhile purposes such as home improvements, medical expenses, a holiday or a new car. You can also opt to receive regular top up payments to help you with paying essential bills and living a more comfortable lifestyle.
- You have the choice as to how you want to receive the borrowed funds. You can choose to take a lump sum, regular weekly or monthly payments, a line of credit or a combination of all three.
- You don't need to make regular payments as the loan is repaid when the home is eventually sold.
- You continue to hold ownership of your home and can live in it for as long as you want.
- Your credit history, income and savings are not considered for you to be eligible for a reverse mortgage. The only considerations are your age, your health and the market value and available equity of your home.
- Even if you don't completely own your home, you can still be considered for a reverse mortgage as long as the current mortgage is paid out with some of the borrowings from the reverse mortgage.
- Your reverse mortgage will never exceed the market value of your home as it is protected by the 'no negative equity' guarantee provided by the National Consumer Credit Protection organisation.
- Your home will continue to increase in value while you continue to own it.
- Some lenders will allow you to protect a portion of your home equity so that you will have enough funds left over after the mortgage is paid out to pay for aged care when you need to move into a facility full time.
- The interest on the reverse mortgage compounds and is added to the total value of the loan on a monthly basis. This means that the loan will continue to grow for as long as it is outstanding.
- Reverse mortgage interest rates may be slightly higher than those for conventional mortgages.
- Mortgage set up fees such as mortgage insurance fees, loan origination fees, title insurance fees and appraisal fees may also be slightly higher for reverse mortgages when compared to traditional mortgages.
- A reverse mortgage will of course, decrease the equity that you have in your home. You need to ensure that you'll have enough equity left after the reverse mortgage is repaid to pay for an aged care facility if you need it and to leave some inheritance for your children if you have any.
- If you've taken the reverse mortgage with a fixed interest rate agreement, it can sometimes be expensive to break if your circumstance change and you need to sell your home.
- Depending on what you spend the funds on, a reverse mortgage may affect your pension payments.
- If you are the sole owner of your home and you have someone else living with you, they may not be able to stay in the home if you need to move into aged care or you die.
What Should You Do Before You Decide To Take Out A Reverse Mortgage?
As with any type of finance, you need to be well informed about how the loan works and what all the fees and charges will be. It's a good idea to seek legal advice and to speak to a financial expert before you consider taking out a reverse mortgage.
Using a mortgage broker can be a good idea as well, as most brokers are well aware of how reverse mortgages work and how they can benefit you as well as how they will impact the value of your home.
You should ask your mortgage broker for a reverse mortgage information statement before you make your final decision. This statement will clearly explain:
- How a reverse mortgage works
- All the costs involved and how they are calculated
- Whether the mortgage will suit your financial circumstances
- Where to find further information
- The mortgage calculations for the amount you want to borrow including the compounded interest so that you will know exactly how much the loan will increase over time and how this will affect the equity in your home
- If there are any special requirements if you still have a traditional mortgage on your home
- If there are any restrictions on what you can spend the funds on
- What type of cooling off period the loan offers
- What will happen if your circumstances change such as if you need to move from the home, if a co-borrower dies or in the event of a divorce or separation.
The most important thing to remember before taking out a reverse mortgage is to be well informed and to seek professional advice. A reverse mortgage can be extremely beneficial for improving your lifestyle in retirement but you need to be sure that it is right for your own circumstances.