A reverse mortgage gives you the chance to access additional funds using the equity in your home as security without having to limit your lifestyle or sell your home.
Depending on the type of reverse mortgage you choose, you can take the money either as a regular income or as a lump sum payment.
As with all loans, interest is charged and is added to the loan balance. However, with a reverse mortgage you make repayments only when it suits your needs and repay the loan in full including interest, fees and charges when you sell your home, pass away or move into aged care.
The benefits of reverse mortgages
- Access the equity in your home
- No regular repayments required
- A no negative equity guarantee (see below)
- You can use it for any personal purpose, including home improvements, medical or holiday expenses.
The risks of reverse mortgages
- Interest rates are generally higher than standard home loans
- The debt can rise quickly as interest compounds
- The loan may affect your pension eligibility
- Tenants who are not borrowers may need to move out if the loan becomes repayable should you pass away or move into aged care
The Australian Securities and Investments Commission (ASIC) suggests this general guide to reverse mortgages:
“If you are 60 the maximum amount you can borrow is likely to be 15-20% of the value of your home. You can usually add 1% for each year older than 60. That means if you are 70, the maximum amount you could borrow would be about 25-30%.”
CommBank’s Equity Unlock Loan for Seniors is a reverse mortgage product we offer to people aged 65 and older.
Negative equity protection
In September 2012, the federal government introduced statutory ‘negative equity protection’ on all new reverse mortgage contracts. This means you’re protected against ever owing the lender more than your home is worth, and you can rest assured that you won’t leave any debt behind for your family (except in certain circumstances such as fraud).
Effects of compound interest
Interest rates are generally higher with reverse mortgages than an average home loan. So it’s likely your debt will increase quickly during the term of your loan.
The knock-on effect could be that when you choose to sell your home, you may not have enough money to pay off the reverse mortgage loan and cover your aged care costs or other future needs.
Use ASIC’s reverse mortgage calculator to work out how much your debt may rise over time and how changes in interest rates and house prices could affect the equity in your home.
Not a quick fix
There are benefits to a reverse mortgage, but before taking one out you should think about your future and be confident that in the long term you can afford to borrow money against the value of your home.
It’s a good idea to seek independent legal and financial advice, and then speak to family members before deciding whether a reverse mortgage is right for you.