Equity is the value of a property you own, minus any mortgage debt. A reverse mortgage lets borrowers from the age of 60 convert this equity into cash.
The amount of equity that can be released is determined by your age and the value of the property.
Once the loan is approved, you can access your money to use however you wish, and the lender charges interest on the amount you owe.
You don't have to make ongoing repayments with this type of product. Instead, the interest payments are added onto the loan balance each month.
How do I repay a reverse mortgage debt?
You repay your reverse mortgage debt when:
You decide to sell your home.
The last surviving borrower dies (if you take out the mortgage as a couple).
You move into an aged care facility.
How do I access the money?
The loan amount can be taken as one of the following, or a combination of the following:
A lump sum.
A regular monthly payment.
A line of credit
How much of my equity can I borrow?
Most lenders let you borrow between 15 and 45% of a property's value. And the older you are, the more you can borrow.
The lender wants to make sure the equity in your property will be enough to cover the loan plus the interest.
For example, if your home is valued at $500,000, you're only able to access a maximum of $75,000. This ensures the value of your home will be enough to repay your loan in full, plus interest.
Some lenders have specific borrowing amounts depending on your age. Here's an example.
Age of Borrower
Percentage of Property Value Available
Use our reverse mortgage calculator to estimate how much you can borrow and what it will cost you
To use the calculator, enter the following details:
Your age. The older you are, the more equity you can borrow.
Your property's value. You can borrow a percentage of your property's value. You can estimate your home's current worth if you're not sure.
An estimate of your property's future value. The lender factors in the future growth of your property's value. You can choose high, medium, low or insert your own figure. Lenders usually go with 3%.
The interest rate. Add the interest for the reverse mortgage product you are interested in.
Payment options. You can get paid in a lump sum or a regular monthly payment.
Is there anything else I should know about these products?
Reverse mortgages are aimed at older people and affect the value of the biggest asset most people own: their family home. That's not to say that reverse mortgages are bad, but borrowers need to do their research and decide if this is the right choice for them.
It's worth keeping the following in mind when considering a reverse mortgage:
Higher interest. Interest charges on reverse mortgages are generally higher than typical home loans. An average variable rate on a reverse mortgage is (at the time of writing) around 6.25%- 7.25%, however this will vary from lender to lender. As the interest compounds, the loan amount can increase rapidly.
Fees. Setup costs for a reverse mortgage may vary between $1,500 - $2,000 depending on the lender. This typically covers the lender application fee, government charges, legal charges and any broker fees.
Pension eligibility. A reverse mortgage may affect your ability to qualify for the pension. Contact the Department of Human Services to find out how it could impact your eligibility to see if you can structure your reverse mortgage in a way that does not interfere with your pension benefit.
Break fees. If you fix the interest rate on your reverse mortgage, the charges to break the agreement can be costly.
If you want to access equity in your property, but you don’t want to take out a reverse mortgage, the primary alternative is to sell or downsize your home. However, this will incur substantial costs such as stamp duty, agent and conveyancing fees so it’s a good idea to weigh the benefits and risks involved.
Frequently asked questions (FAQ) about reverse mortgages
Yes. Your name is still on the title and you retain ownership of your home.
Yes. It's completely up to you when you choose to sell your home or move into a care facility.
As of the 18th September 2012 the Government introduced 'negative equity protection', meaning you can't end up owing the lender more than your house is worth. For contracts entered into before this date, there are still options for you. Some lenders out there are willing to extend a 'Negative Equity Guarantee'. This means your loan amount cannot exceed the value of your property, so you won't ever be forced to sell your home. You or your estate also won't be asked to cover any shortfall that may arise in the event that your home is sold for less than the amount owed on your reverse mortgage.
It is possible to choose a 'Protected Equity Option' with some lenders. This lets you preserve a predetermined amount of equity that can't be accessed for future use as inheritance for your beneficiaries. For example, if you want to protect 20% of your equity for inheritance purposes, your lender will calculate the amount you can borrow to protect this amount.
For example: if your home is worth $500,000, 20% of this amount is $100,000. So the lender will calculate how much you can borrow based on only having $400,000 in equity available.
Richard Whitten is Finder's home loans writer. He helps Australians understand the ins and outs of mortgages so they can find lower rates and make smarter property decisions. Richard trained as a high school English teacher at the University of Sydney, but found that mortgage management was more rewarding than classroom management. Before working at Finder he lived in Seoul, where he edited textbooks and ran communication courses for Korean corporations.
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