Reverse Mortgages

Reverse Mortgages

What Is A Reverse Mortgage?

A reverse mortgage allows you to take equity out of your home in the form of cash without downsizing or selling your property. This equity can be taken out in a lump sum, through regular ongoing payments or through a combination of both. Reverse mortgages are available to seniors (60 years or older). The principal loan amount is not required to be paid back until you are no longer residing in the house (either through death, sale of the home or moving into an aged care facility) you can live outside of the home for a maximum of 364 consecutive days.

There are no income requirements or medical tests that are required for reverse mortgages as no regular interest payments need to be made. Instead the interest is added to the original loan amount and this is paid back in full once the reverse mortgage finishes.

How Much Can You Borrow With Reverse Mortgages?

The amount you can borrow will depend on a number of factors; your age (and partners age), value of the home and the interest rate available. In general you can borrow anywhere from 15% to 40% of your homes value – the older you and your partner are the more you should be able to borrow. One important thing to consider is that if you borrow the maximum amount now you will not be able to borrow again in the future.

How Much Does A Reverse Mortgage Cost?

The start up fees for a reverse mortgage are slightly more expensive in comparison to a regular mortgage ($5,000-$7,000 versus $2,000-$5,000), some reverse mortgages also come with small monthly administration fees – although it’s often possible to get lenders to remove these fees when signing a contract (the fees are usually around $10-$20 per month).

The interest rate that you are offered will be dependent on a few factors such as:

• Fixed VS variable
• Reserve bank interest rate
• The lender you use

NNEG - Non Negative Equity Gaurantee

A non negative equity guarantee (also known as NNEG) is simply a gaurantee by the lender that you will never owe more than the house is worth. By having this guarantee you are making sure that you’ll never owe the lender more than you can afford to pay. Not all lenders have NNEG’s so it’s important to ask when signing up. There are a few conditions on NNEG’s, for example you must maintain and repair your house to the minimum standards set out in your NNEG agreement. It’s important to read this agreement carefully to understand what these standards are and ensure to stick to them – it might also be a good idea to get an attorney to have a look over this information for an independent legal perspective.

SEQUAL - Senior Australians Equity Release Association of Lenders

SEQUAL is an association of lenders that deals with reverse mortgages, it’s always a good idea to ensure that your lender is part of SEQUAL as all members are required to meet minimum standards. For example all SEQUAL members are required to offer a NNEG to their reverse mortgage customers.

Case Study Of A Reverse Mortgage

Disclaimer, this is a fictional case study – all information in this study are not real and are used for demonstrational purposes only. Any similarities between the people or situations involved are coincede only

Trudy (aged 65) And John (67) own a four bedroom house with a nice front garden in Moonee Ponds, Melbourne, Victoria, Australia. They’ve recently had their house valued for $1,200,000, their own the home outright and both have been retired for the last two years. In their younger years they had always discussed purchasing a camper van and travelling around Australia, unfortunately they were not able to save up the $40,000 that the camper van costs.

They heard about reverse mortgage from a friend of theirs and decide to take the plunge and get a loan of $50,000, it has an establishment cost of $5,000 and monthly fees of $12, they are able to get a fixed interest rate of 10% – their realtor tells them that they can expect the value of their home to increase by 4% per year. To recap:

House Value: $1,200,000
Loan amount: $50,000
Establishment fees: $5,000
Monthly fees: $12
Interest rate: 10%
Assumed Annual Increase In Home Value: 4%

Trudy and John get the reverse mortgage and go on the trip that they always dreamed of, after ten years they decide to move into an aged care facility as John is having trouble with his right hip. During this time the $50,000 they have borrowed has increased to $151,622, when they finally sell the house they receive $1,776,293 – which is a return of exactly 4% per year as their realtor suggested. Once paying off the reserve mortgage they are left with $1,624,671 which is more than enough to get a nice apartment in a friendly aged care facility whilst also allowing them to give their children enough money to put down a deposit on their own homes.

Verdict: Trudy & John were able to go on the trip they always imagined without selling their houses, they were also able to avoid going into heavy debt by only borrowing a small manageable amount. Not only were they able to transition into an aged car facility, they still had enough money from the sale of their own home to give their children a leg up in life.

This is just one example of how a reverse mortgage for seniors can positively affect their life. The statistics from this case study were based upon information that was generated by our reverse mortgage calculator.

Pros & Cons Of A Reverse Mortgage

Advantages Of A Reverse Mortgage

• Access to the equity tied up in your home without having to sell your house and downsize
• No repayments must be made whilst you are still residing in the house
• Flexible terms
• No Negative Equity Gaurantees (NNEG) means you’ll never owe more than the property is worth

Disadvantages Of A Reverse Mortgage

• Often come with high set up fees (in the range of $5,000-$10,000)
• Compounding interest means you could quickly owe more than you expected – leaving less money for your estate/your children’s inheritance
• Higher rate of interest than a typical home loan
• Can affect your eligibility for the pension (See: Reverse Mortgage Centrelink)
• NNEG can be lost if you don’t maintain your house to the proper standards