Home Equity Release and Reverse Mortgages

There some things you may want to consider before taking out a reverse mortgage:

• Reverse mortgage interest is calculated on the daily balance outstanding and added monthly to you loan account, meaning your loan balance will increase over time. This is known as Compounded Interest.
• Once you move permanently from your home, the entire loan balance will be payable within 12 months.
• The amount of equity you can draw is determined by your age, property value, and other loan approval criteria.
• Drawing funds from your property now can reduce what you could potentially access later on.
• Variable interest rates mean that there will be changes to what you are charged over time.
• There are fees and charges for setting up the loan with the Lender, depending on what options you select and the Lender.

Reverse mortgages are a popular choice for asset rich and cash poor homeowners and for those who want to supplement their pension. A flexible reverse mortgage can be an effective way to improve your cash flow during your retirement, however, there are lots of complex factors to consider before deciding if a reverse mortgage is right for you. We strongly recommend consulting your family prior to choosing a reverse mortgage. Here are some factors to consider when deciding if a reverse mortgage is right for you.

Consider your future needs – Before choosing a reverse mortgage, take into account how your needs might change in 10, 20 or 30 years’ time. You may have additional healthcare costs, may be required to move into care or may need to modify your home. If you use too much of your home’s equity too soon you may be caught short.

Think of your family’s inheritance – A reverse mortgage will reduce the amount your family will make from the sale of your home after you pass away. It’s important to discuss your family’s needs and make an informed decision before applying for a reverse mortgage.

Plan your purchases – It can be tempting to splash out and use your reverse mortgage line of credit to purchase lavish holidays, new vehicles and other big-ticket items. While this is a perfectly suitable way to spend your money, it’s also important to pace yourself and make strategic decisions with your funds to ensure you have enough to last throughout your retirement.

Legally, lenders who offer reverse mortgages must guarantee that once your reverse mortgage contract comes to an end you will not be expected to pay back more than the value of the home. So, if for any reason your property sells for less than the amount borrowed for your Reverse Mortgage, you will only need to pay the amount that’s earned from the sale of your house. Your lender is obliged to cover any shortfall if the sale of your home doesn’t fulfil the cost of your Reverse Mortgage. This is called the No Negative Equity Guarantee.

The No Negative Equity Guarantee sets a Reverse Mortgage apart from regular home loans. A person who holds a regular mortgage will be liable to all costs, even if the loan price exceeds that of the sale price of the home in cases of real estate market decline.

Note: There are exceptions to the No Negative Equity Guarantee. Foe example, the No Negative Equity Guarantee will generally not apply in cases where we determine that a borrower has provided fraudulent or material misrepresentation pertaining to their Reverse Mortgage loan before, during or after the contract was established. Minimum maintenance requirements are also required to be met for a borrower to qualify for the No Negative Equity Guarantee.

Yes, you will need to seek independent legal advice. We also highly recommend you seek out a professional financial advisor who can explain the aspects of a Reverse Mortgage and its impact on your overall financial situation. Reverse Mortgages aren’t a one-size-fits-all solution and it may not be the right option for you. We also highly recommend that you speak with your family members and any beneficiaries of your estate as a Reverse Mortgage will impact the inheritance they receive from the eventual sale of your property.

Once the last homeowner has passed away, the loan is settled by the estate within 12 months.

Your children and/or estate has 12 months to pay out the loan.

Yes, subject to the Lenders terms and conditions you can repay all or part of your loan, without penalty.

In most cases there will not be an impact to the Age Pension, except where a large amount is withdrawn and invested/placed in the bank such that it impacts your asset test or income test.

Reverse mortgages should be drawn down gradually and used as needed; this should not impact the pension and will minimise the amount of accrued interest. We always recommend you speak with Centrelink toe ensure your pension entitlement are not impacted. Please note that if your receiving the pension and propose gifting funds drawn from home equity, this should be checked with Centrelink which has clear gifting rules.