So What Is A Reverse Mortgage?
Quite simply, a reverse mortgage is a special home loan for seniors over the age of 60 which allows you to turn the equity that you’ve accumulated in your family home into available cash.
The loan requires no regular payments as the debt is repaid from the future sale of the home. The lender will only ever take a first mortgage on your property and you continue to own it for as long as you wish.
What Can You Use The Funds For?
When you take out a reverse mortgage on your home, you can use the funds for any worthwhile purpose. This may include:
- Home Improvements – You can use some of the cash to make improvements to your home. For example you might want to add some mobility assistance features to your home to make life a little easier as you get older.You can take a lump sum from your reverse mortgage to pay for things like ramps, if one of you is in a wheelchair or needs to use a walker for mobility. You can install handrails in the bathroom and toilet to make it safer or you might want to remodel the kitchen to allow easier access to appliances and kitchen tools.These type of home improvements can mean that you can continue to live in your family home for much longer than you may have thought possible previously.
- Travel And Holidays – Let’s face it, most of us dream about doing some travel when we retire to visit all the places we’ve always wanted to. Unfortunately, travel takes both time and money. Now that you’re retired you may have the time but not the available funds.A reverse mortgage can give you the available cash to fund your travel plans and let you visit some of the places you’ve always wanted to see. You might like to go on an extended cruise or take a trip to Europe to visit distant relatives or explore your ancestral birth place.Maybe you’ve always dreamed about taking your grand kids on a trip overseas or maybe you have children and grand children who live in another country and you would love to visit them and have an extended holiday with them. With a reverse mortgage, you can afford to do all these things and more.
- Purchase A New Car – Taking out a personal car loan in your retirement is most likely not something that you want to think about or consider. The problem is, your current car is now quite a few years old and is starting to need some major repairs.With a reverse mortgage you can access some of the equity in your home to pay for a new car outright. This means you can drive around in comfort without worrying about whether your car is going to break down when you take a drive to visit your grand kids.
- Debt Consolidation – If you have a credit card debt, a personal loan or maybe both, you don’t want to have to worry about whether you’ll be able to make the repayments once you retire.A reverse mortgage can help you to consolidate these debts so that you can pay them out and therefore not have to make any more repayments. This can not only give you peace of mind but can mean that you save a considerable amount in interest too.
- Medical Expenses – As we age, so do our bodies and we may find that we need more medical care than we had previously. You or your partner may need a hip operation for example, and in retirement you certainly don’t want to be on a waiting list to access the public system.Alternatively, you may find that you need some major dental work or new dentures which can be quite costly especially if you no longer have private health cover or you’ve already used up your allocation for the year.With a reverse mortgage, you don’t have to worry about how you are going to pay for any medical expenses that come up as you’ll have access to funds whenever you need them.
- Aged Care – If one or both of you have reached the stage where you need to go into long term aged care, a reverse mortgage can help you fund this. As the demand for aged care increases, so do the costs.Before moving into aged care, you’ll be asked to pay either a Refundable Accommodation Deposit (RAD) and/or a Daily Accommodation Payment (DAP). In the past, this would have required selling the family home to fund these payments. This would of course, be very difficult if only one partner needs to move into aged care but the other one would like to remain in the family home.Now, with a reverse mortgage, you can pay for the aged care and still retain the family home which means that one partner can stay in the home, the home can be kept in the family for other members or it can be rented out if you wish.
- Extra Retirement Cash Flow – If you are now living on a pension, releasing some equity in your home can help you with everyday expenses such as bills and living costs. This can certainly give you peace of mind knowing that you’ll always have access to available cash when any major bills come in.It will also allow you to have a much better lifestyle as you can afford to go out for lunch regularly or treat your family to a special birthday dinner. Not having to worry about money in your retirement is what you’ve worked hard for all your life!
So How Does A Reverse Mortgage Work?
The amount you can borrow is determined by your age and the market value of your home. For example, at age 60 most reverse mortgage lenders allow you to borrow up to 15% of the total value of your home. This borrowing capacity increases as you age. At age 90 you can access up to 45% of your available home equity.
You can take the funds either as a lump sum, a cash reserve, a regular advance or a combination of all three.
Here’s an example to show you how it all works:
- A 60 year old couple, Roger and Joan, own a home with a market value of $600,000.
- They decide to take out a reverse mortgage and borrow $60,000 as a lump sum for home improvements.
- 1 year later, they draw another $10,000 to buy a new car.
- 2 years later, they draw another $20,000 for an extended holiday.
- In year 4, they draw another $10,000 for medical expenses.
- Assume that the interest rate is 7% and their home is increasing in value by 3% every year.
- Each month the interest on the loan balance is capitalised and added onto the loan total.
- The debt grows as the interest compounds but the home value also increases over the years.
- After 10 years, the market value of the home is $629,000 so therefore the couple have more equity in their home than they did at the time of taking out the reverse mortgage.
- This means that Roger and Joan have still retained about 78% of the equity in their home.
This future equity is determined by how long the reverse mortgage is in place, the growth value of the home and the variable interest rate over time.
It should also be noted that as a reverse mortgage holder, you can make voluntary payments at any time if you wish.
The amount borrowed, plus any interest and fees which have accrued over the lifetime of the loan, will be repaid when you sell the home or from your estate when the last surviving borrower passes away.
What Are The Benefits Of A Reverse Mortgage?
There are many benefits to taking out a reverse mortgage on your home but the main ones are:
- The peace of mind that you will always have access to ready cash when you need it.
- A much better lifestyle in your retirement.
- Less stress because you don’t need to worry about where you’re going to find the money to pay your bills and everyday expenses.
- You don’t have to sell your family home or even downsize to access extra cash when you need it.
- The freedom to change your lifestyle whenever you want.
Do you think that a reverse mortgage may be something that could benefit you in your retirement? If so, you should definitely speak to one of our professional mortgage brokers here at Solution Home Loans.
We have access to over 30 lenders and can find a loan that is tailored specifically for your needs. This is a FREE service and we do all the work for you.
Solution Home Loans have over 10 years experience in the home finance industry and we listen to what our clients need to ensure that we pair you up with the perfect lender to suit your particular situation.
Just to give you an idea of what we can do for you, here’s a recent case study of a lovely couple who we recently helped to secure a reverse mortgage for. By the way, we’re not using their real names of course!
Steven is 67 and Jennifer is 65. They’re both retired and Steven had to have a major operation last year. The couple spent almost all of their life savings on the medical treatments including the operation, the medication and ongoing treatments. This left them with very little money in their savings account.
Before coming to us, Steven and Jennifer were struggling to meet their everyday living expenses as well as ongoing medical costs. Fortunately for them, they owned their own home in a Sydney suburb which was valued at $1.8 million.
We were able to help Steven and Jennifer to access some of the equity in their home through one of our lender partners. This means that the couple are now able to meet their everyday living expenses as well as future potential medical expense.
And we at Solution Home Loans, can do the same for you. Through our expertise and knowledge we can help you live a better retirement lifestyle.
When you talk to a Solution Home Loan broker, you can rest assured that you will have a caring, professional on your side throughout the entire process.