Reverse mortgages

• Always get professional financial advice before taking out a reverse mortgage.

How do reverse mortgages work?

Here are the basic facts on reverse mortgages:

• You need to be at least 60 years of age to get one.
• You need to have equity in your property.
• The bank will lend you money based on this equity.
• You repay what you borrow, plus interest, when you sell the property or pass away.

A reverse mortgage lets you unlock some of the wealth in your home now so that you can spend it to cover costs and fund part of your retirement. The key thing you need to understand is that you ultimately need to repay the debt by selling your property.

When this happens, a substantial amount of the property's value will go to the lender (depending on the interest charges and how much you borrowed). If you don't do the maths correctly you could find yourself short on cash towards the very end of your life.

And if you're planning to leave your property to your children, understand that taking out a reverse mortgage could substantially reduce their inheritance.

What is equity?

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.

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.

To minimise the risk of paying too much interest, you should only borrow what you need. Carefully consider the current value of your house and the amount of equity you intend to borrow from it. Speak to a mortgage broker or financial planner to determine how much the interest charges will be in total.

Are there any alternatives to reverse mortgages?

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

• Will I still own my own home if I get a reverse mortgage?

  Yes. Your name is still on the title and you retain ownership of your home.

• Can I stay in my own home for as long as I wish?

  Yes. It's completely up to you when you choose to sell your home or move into a care facility.

• What if I sell my home for less than the reverse mortgage loan amount?

  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.

• Can I make sure I still leave my family an inheritance?

  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.