Planning your retirement? Here are 4 things you need to know about reverse mortgages
A reverse mortgage could let you use some of your home equity to fund your retirement costs. Here's what you need to know.
There are many ways older Australians can fund their retirement expenses, including accessing their savings, downsizing their homes and accessing their superannuation.
But would-be retirees who own their own homes have another option: reverse mortgages. Read on to find out how these unique products work and how they can help you.
1. How reverse mortgages work
A reverse mortgage allows you to borrow against the equity in your property to spend as you need it. You repay the debt, plus interest, when you sell the property.
Here are the basic facts on reverse mortgages:
- Reverse mortgages let Australians aged 60 or older borrow a percentage of their equity. Generally, the older you are the more you can borrow.
- Equity is the value of your home, minus any debt you have remaining. If you've paid off your entire mortgage then you have 100% equity.
- While you don't have to repay any of the equity you borrow right away, you are charged interest over time, and fees.
- You repay the debt when you move out of your home, usually when you sell the property you've borrowed against, move into aged care or pass away.
Always seek professional advice when considering a reverse mortgage
It's important to understand how reverse mortgages work and the costs involved before borrowing using equity from your home.
Consider the following:
- Borrowing against your equity means there is a mortgage against your home. When you sell the property a portion of the sale price will go to your reverse mortgage lender to repay the debt. This would also reduce the size of your estate remaining for your beneficiaries.
- As interest compounds over time, your debt will grow.
- Taking out a reverse mortgage may affect your ability to access the Age Pension. While this isn't always the case it's important to check your entitlements with Centrelink.
- Reverse mortgages can reduce the capital available for future costs like medical expenses and residential aged care deposits. However, some providers offer aged care which can cover these costs.
- Reverse mortgages often come with fees, including ongoing fees or an upfront fee as a percentage of the amount you have borrowed.
Reverse mortgages are complex products. Getting legal advice is compulsory before taking out a reverse mortgage. It's also a good idea to speak to a financial advisor.
How much can you borrow?
Every reverse mortgage lender has a different maximum they are willing to lend you. It also varies depending on your age and the value of your home.
Borrowing limits are typically set well below those of standard home loans, which let you borrow 80% of a property's value or more. Most reverse mortgages are set to around 45% of your equity if you are aged 90, and lower than 45% the younger you are.
Heartland Seniors Finance's Standard Reverse Mortgage, for example, lets you borrow up to 45% of your home equity. This means if you fully own a $800,000 property you could borrow up to $360,000.
These limits mean that when you sell your property you could still get some of the profits back once your debt is repaid. But you need to keep in mind that interest charges will add up every month, increasing your debt and reducing the amount of equity you have in the property. You are, however, free to make repayments towards the debt at any time. Some lenders, such as Heartland Seniors Finance, also offer a redraw facility that allows you to apply to get those repayments back again if needed.
2. You can access your equity in different ways
One advantage of reverse mortgages is their flexibility. You are only charged interest on the amount of equity you access, and you can access it in different ways for different purposes.
- A regular monthly payment. You can choose to receive a regular ongoing payment, perhaps to supplement your income. Some providers offer quarterly or annual payments to cover large expenses.
- A line of credit. This option (sometimes called a cash reserve) allows you to borrow up to a set amount, with the option to use some of the equity now and more later.
- Lump sum payment. Some lenders allow you to borrow a single lump sum and spend it to cover a large expense.
Note that different reverse mortgage lenders have different rules about how much you can borrow and how you can receive the payments.
Heartland Seniors Finance, for example, allows borrowers to access their equity via a lump sum, regular cash advance, plus a cash reserve option for emergency expenses.
3. You can keep living in your family home while funding your new lifestyle
One of the biggest benefits of a reverse mortgage is that you can stay in your home while accessing extra funds.
Many retirees wish to stay in their family home rather than downsizing or moving into aged care. A reverse mortgage can make this easier to achieve.
You can use the money from a reverse mortgage to pay for anything, including:
- Renovations. You may find that you need to renovate your home to make it more comfortable in your retirement. A reverse mortgage payment can fund this expense and let you stay in your home.
- Big purchases. A reverse mortgage can pay for big one-off purchases such as a holiday or a car.
- Income supplements. Using a regular ongoing payment from a reverse mortgage can help you cover reduced income when you retire, letting you leave your savings and super untouched.
- Debt. You can also use a reverse mortgage to consolidate or repay existing debts.
4. You can repay your reverse mortgage debt in various ways
The standard way to repay a reverse mortgage is by selling your property. You receive the proceeds of the sale, minus the money you've borrowed against your equity. Of course, you will also be charged interest on this money. There may also be lender fees to pay.
It's important to use a reverse mortgage calculator to get a clearer estimate of how much a reverse mortgage will cost you.
But there are other repayment options. Some lenders, such as Heartland Seniors Finance, offer unlimited additional repayments for reverse mortgage borrowers. This effectively allows you to repay what you've borrowed early, rather than waiting until you sell. This added flexibility can be helpful in reducing your overall interest costs.
Please note the information set in this article may change from time to time. Every situation is different – this information has been prepared without taking into account your needs, objectives or financial situation. If you are considering a reverse mortgage, we encourage you to understand how it may affect your personal circumstances – talk to friends and family, speak to professionals, and use the resources and tools Heartland has available. Subject to complying with the terms and conditions of your loan, you will not owe more than the net sale proceeds of your home and you can keep your home for as long as you choose. There is no assurance that property values will increase over time, and property values may also decline. Applications are subject to loan approval criteria. Terms, conditions, fees and charges apply. Credit provided by ASF Custodians Pty Ltd (ACN 106 822 780 / Australian Credit Licence No. 386781).