Reverse Mortgages

Reverse Mortgages have been marketed as a practical way for people over 60 to finance their retirement. In effect it is a loan that allows a senior to borrow an amount of equity against the agreed value of their unencumbered home, which is used as security. However unlike other loans, no repayment is necessary during the life of the loan, while interest continues to be accrued monthly throughout the length of the loan. Ultimately the amount that can be borrowed is determined by the Bank and will be repaid when the home is sold or upon death.

There is no legislation covering Reverse Mortgages and the determination of suitability to depend on an investigation on the various terms offered. There is however the Australian Prudential Regulation Authority who regulates Banks, Consumer Competition Laws that protect the consumer, and Australian Securities and Investments Commission (ASIC).

While reverse mortgages have the potential to significantly improve the quality of life of older people with few assets other than the family home, they have significant risks and are not suitable in all cases. The product suits consumers who are asset rich, but cash poor, and have limited opportunity to generate new capital and importantly offer flexibility in the use of funds. ASIC has developed an online reverse mortgage calculator at www.moneysmart.gov.au which can help you see the impact a reverse mortgage can have on your asset.

The No Negative Equity Guarantee offered by some banks protect you against negative equity by putting a limit on how much you can owe, yet this is not offered by all Banks. Nevertheless due to the compound interest, fees and lack of repayments, the amount owed on a reverse mortgage can grow very quickly and in the worst case scenario, there may be no money left to pay an accommodation bond.

There are costs associated with the product which can include, entry, ongoing and exit costs, and the loan amount will increase through the compounded interest amount. Loan conditions may require the value of the asset to be upheld through fixing and maintaining the property, adding further costs.

Reverse mortgage products can expose home owners to financial risks, largely because of a number of ‘unpredictable’ factors including interest rates, real estate prices and life/independence expectancies.

Depending on your needs there may be better suited options, which include;

• Lump Sum Advance Payments which allows for an advance of future income support entitlement and is repaid over six months by direct deductions from pension payments.
• Other options include selling your home (to downsize or rent), use other assets (like superannuation), and making the most of your current income through pensions.
• Ultimately, once of Age Pension age, you can use the Pension Loan Scheme to access equity in your home. Providing pension payments, up to the maximum pension rate, to people not entitled to the full pension because of income or assets. Beneficially the interest rate is significantly lower than commercial products.

There has been various criticism and praise about Reverse Mortgages; however final determination on whether a Reverse Mortgage is suitable for you will depend on individual circumstances, such as personal values and family life, as well as the Banking terms of the loan and consideration of the alternatives.

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