As you may well be aware, there have been recent changes to the age pension asset test which can leave some seniors without enough funds to meet their living expenses in retirement.
If you’re in this position or are likely to be in the future, taking out a reverse mortgage on your home may be a viable solution. This can allow you to access some of the equity in your home which you can take as a lump sum or as regular payments to supplement your pension.
Currently there are around 40,000 reverse mortgages in Australia with a total value of around $3.6 billion so reverse mortgages have certainly increased in popularity over the past few years.
How Do You Qualify For A Reverse Mortgage?
To qualify for a reverse mortgage you must be over 60 years of age and own your own home. You don’t have to have any proof of income because a reverse mortgage does not require you to make any repayments for the duration of the loan.
The amount you can borrow largely depends on your age and the value of your home. For example, at age 60 you can generally borrow up to 15% of the value of your home. This percentage increases with your age, so the older you are, the more you are able to borrow.
How Does A Reverse Mortgage Work?
Essentially, a reverse mortgage allows you to borrow cash against the equity which you have in your home. You do not need to make any repayments, however the interest is compounded and gets added to the value of the loan as well as any fees and charges.
This effectively increases the debt over time and could easily double the amount you owe over a ten year period. The loan is repaid either when you sell your home, you go into aged care or you die. The proceeds from the sale of your home will then be used to repay the reverse mortgage.
What Are The Benefits Of Taking Out A Reverse Mortgage On Your Home?
There are quite a few benefits for taking out a reverse mortgage on your home in your retirement. The main ones include:
- It allows you tap into the equity of your home to get access to ready cash when you need it.
- This can be taken as a lump sum or regular payments to give you more available cash for everyday living expenses.
- If you need to do some renovations to your home to make life a little easier, you can take a lump sum to pay for these without touching your pension income.
- You still hold the title to your home and can stay living in it for as long as you want.
- You can access funds to do some travelling, now that you have the time.
- If you or your partner need some urgent medical care, you have access to funds to pay for it.
- If one of you needs to move into aged care, a reverse mortgage lets you access some of the available equity in your home to pay for the care.
- You don’t have the stress of needing to make regular repayments, however you can make some repayments if you want to.
- If you have an investment property, you may be able to take out a reverse mortgage on it and leave your family home unencumbered.
- You don’t have to sell your family home to access extra cash to help you financially in retirement.
- You can use some of the funds to buy a new car if your current vehicle is getting a little old and is starting to need a lot of major repair work.
Are There Any Disadvantages To Consider When Taking Out A Reverse Mortgage?
As is the case with most loans, there are things you need to consider before you decide to take out a reverse mortgage. These include:
- Interest rates on a reverse mortgage are usually slightly higher.
- The interest is compounded and added onto the debt so this means that the debt will continue to grow for as long as you have the loan.
- If you’re not careful, you could end up owing more than what the home is worth when you sell it.
- If you need to sell your home and move into an aged care facility, you may not have enough equity left to pay for the aged care.
- A reverse mortgage usually comes with some conditions such as the fact that you need to maintain the home to a certain standard as set out by the lender. This could become difficult as you get older.
- If you are the sole owner of the home but share it with someone else and you need to move out or die, the other resident of the home may not be able to continue living in it.
- If you take the reverse mortgage as regular income payments, these may affect some of your pension eligibility.
Are There Any Safeguards You Can Take Before You Take Out A Reverse Mortgage?
The first thing you want to do before you consider taking out a reverse mortgage is to talk to a financial advisor or a mortgage broker who can advise you on all the pros and cons of a reverse mortgage as it pertains to your particular situation.
You should also ensure that the reverse mortgage you choose has a “no negative equity guarantee”. This means that if you do end up owing more than what your home is worth when you need to sell it, you will not have to repay any more than what you sell your house for.
When taking out a reverse mortgage you can also opt to protect a portion of the value of your home. For example, you can choose to have a certain amount of your home equity protected to pay for an aged care facility when you need it.
A mortgage broker can explain how this works and provide you with some estimates by using a reverse mortgage calculator so that you can explore all the available options. When talking to your broker, make sure that you receive a reverse mortgage information statement which includes:
- How a reverse mortgage works
- How the costs are calculated
- What you should consider before taking out a reverse mortgage
- How to get more information if you need it
In summary, a reverse mortgage can provide you with extra cash so that you can still enjoy a great lifestyle in retirement. You just need to do your research to ensure that this is a good option for your particular circumstances.