Picture this: you are already retired, but you find yourself in need of income. Many Australians who have worked their whole lives and are diligently paying off their loans often experience this. Since most of their savings are locked up as equity in their home, they find it hard to enjoy the fruits of their labour. Fortunately, there is a solution.
In this post, we will shine a light on reverse mortgages and clarify five common misconceptions about them.
What is a Reverse Mortgage?
Reverse mortgages are loans that are specifically designed for pensioners or retirees. They are often mistaken as home equity loans; however, there are significant differences between the two:
- Anyone can apply for a home equity loan. Reverse mortgage loans are only available for retirees that are above the age of sixty.
- A home equity loan is usually paid regularly. The entire loan balance becomes payable on a reverse mortgage loan if the borrower passes away, moves out of the property for twelve consecutive months, or sells the property.
Unlike any other loan, a reverse mortgage does not require any payments. However, like any other loan, the borrower is subjected to pay interest.
Read on for a thorough debunking of reverse mortgage myths:
Myth #1: The Borrower Loses Ownership of the Property
This is not true at all. The borrower always retains full ownership of their property. The lender will only take the property’s mortgage. Thus, the homeowner’s debt increases over the loan’s life while the property’s mortgage decreases.
Myth #2: Reverse Mortgages are Scams
Many people question the legitimacy of reverse mortgages. However, a reverse mortgage is regulated by the Australian Securities and Investment Commission (ASIC). Their regulations are paramount in terms of the borrowers’ protection.
Myth #3: Reverse Mortgages Are a Last Resort
Traditionally, reverse mortgages are considered a last resort for seniors who want to stay in their homes but have limited resources and options left. Research and market trends have proven otherwise. As the Australian market grows, these types of loans become increasingly sophisticated and more flexible.
Myth #4: The Heirs Will Not Inherit the Property
Again, the homeowner retains full legal ownership of the property. Hence, they can still leave the property to their heirs. However, there will be a lien on the title for the loan plus any accrued interest and mortgage insurance premiums.
Reverse mortgage loans are also non-recourse loans, which means the borrower, or their estate, will never owe more than the loan balance of the property’s value, whichever is lower. Additionally, no assets other than the home will be used to pay the debt.
Myth #5: Reverse Mortgages Are Expensive
Generally, the proceeds are tax-free. However, like any other mortgage loan, a reverse mortgage loan is subjected to fees during its establishment. These fees are commonly known as set-up costs. These costs may vary on the property value, market conditions, interest rates, and loan terms. The fees are usually computed based on various factors like life expectancy and how many years the owner has resided in the property.
Reverse mortgage loans can be a valuable tool for senior homeowners who have a thorough knowledge of loans and trade-offs. Anyone who takes an interest in reverse mortgage loans must take the time to study how these products work or consult with experts so they can make sound decisions.
If you are looking for alternative finance in Sydney, Wealthy You offers a variety of mortgage solutions to meet your specific financial needs. As an alternative lending specialist, we make refinancing your home simple. Talk to us now!