What method is helping Australians retire with access to more than enough money?
If you've built equity in your home you may qualify to get a reverse mortgage. This is when a lender loans you money against your home and you don't have to make monthly repayments to repay the money you borrow. You only have to repay the money when you no longer live in the house, upon your passing away, if you decide to sell your home, or if you move into a retirement home.
While such loans don't come with criteria surrounding a borrower's income, lenders tend to keep the minimum borrowing age to around 60 years and they also have to lend money responsibly, as the law stipulates. There are different ways you get access to the money, which can include a lump sum payment, monthly payments, a line of credit, or even a combination of these.
Since you don't have to make repayments until you live in the house, know that the interest you have to pay at the end can end up being a significant amount. This is because it’s still calculated the way it would be on a regular home loan, but also compounds over a period of time given that you don't make interim repayments.
Using a reverse mortgage calculator gives you the ability to find out just what you're up against if you do decide to take the plunge and by tweaking certain parameters you can establish what works better for you.
How to use the reverse mortgage calculator
Using the calculator requires you to add certain information regarding the borrower, the property and the loan in question.
- Age of borrower. Age comes into play because most lenders follow the same principle in this regard—older borrowers qualify for more. For example, while a lender might allow you to borrow 20% of your home's value when you're 60, the same lender could offer as much as 40% by the time you're 75.
- Property value. Property value plays a role in how much you can borrow, because lenders normally limit their reverse mortgage loans in between 40 to 50% of property values. So, if your home is valued at $600,000, expect to get no more than $300,000. Borrowing any less is easier and some lenders have limits on the minimum amount you can borrow.
- Protected equity. This refers to the equity in your home you want to keep protected. Over a period of time, you continue to lose equity in your home and there can come a point when you don't hold any equity in your home at all. To protect against this eventuality, you can retain a given percentage of equity in your home.
- Estimated property growth rate. This is how much your lender expects your property to grow in value each year. Most lenders stick to an average of 3% growth per year.
- Payment option. Once you know how much you wish to borrow you have to decide if you want the money in the form of a lump sum payment or regular monthly payments. With monthly payments, you can choose the amount and the duration they go on for as long as the total amount falls within what you qualify to borrow. In case you receive monthly payments, find out if the lender charges interest on the money only after disbursing it.
- Interest rate. This is the interest the lender charges against the money you borrow and varies from one reverse mortgage to another. Even a drop of half a percent can make a significant difference, so it’s important to take this into consideration when comparing your options.
Case study using calculator
Bruce, aged 65, lives in a home valued at $700,000 and wants to find out what his reverse mortgage options are. He wants to borrow $100,000 and luckily, he qualifies for a little more than that. He decides to use the reverse mortgage calculator to find the best reverse mortgage option for him.
The first reverse mortgage option he comes across offers him an interest rate of 8.50%. This option will bring his equity to zero in 31 years and two months. His second option is one that attracts an interest rate of 8.00%, a difference of half a percent and in this case his equity would drop down to zero after 34 years and three months, a difference of over three years. After considering all the aspects of the mortgage he decides this is the best option for him and it’s the one that Bruce chooses.
Just how much Bruce will have to repay depends upon when he plans to repay the loan. The sooner he does, the less he pays in the form of interest, which compounds with time. In any case, he has more than 34 years to go before the equity in his home falls to zero.
Frequently asked questions
Can I end up owing my lender more than the value of my home?
Theoretically, yes you can, given the compounding interest due. However, the Australian government passed a regulation stating that borrowers entering reverse mortgages after 18 September 2012 cannot owe more than the value of their homes.
Can getting a reverse mortgage affect my pension?
Getting a reverse mortgage can have an effect on your pension entitlements, so getting in touch with the Department of Human Services to find out how you can avoid any negative impacts on your pension is a smart move.
Who is a reverse mortgage best suited for?
Reverse mortgages can be ideal for retirees who own homes but don't have enough money to lead the lifestyle they'd like.
If you require money during your old age and if you own a home, getting a reverse mortgage may be suitable. Given that a number of lenders offer reverse mortgage loans, picking one requires going through your options carefully and using a reverse mortgage calculator is an great way to start.