If you’re considering a reverse mortgage, it pays to know which is a myth and a fact. Here are 7 most common myths on reverse mortgage.
Reverse Mortgage comes with varied notions and opinions. From the financial product met with hostility, to it being seen as a solution to a problem, particularly to elevate a retiree’s lifestyle. It also doesn’t help that the traditional reverse mortgage solutions from the late 1990s to early 2000s created a stigma and misconceptions that have surrounded reverse mortgages.
Although, upon the introduction of the National Consumer Credit Protection Act (2012), reverse mortgage lending is now one of the most strictly regulated credit solutions in Australia, with precise market parameters and consumer protections applying to all loans.
ASAG offers an Equity Release, which is structured as a reverse mortgage. This means these legislative protections apply to our customers.
So, let’s debunk some of those myths that comes around time and again.
1. You-can-lose-your-home Myth
Instead of losing your property, you can live and remain in your home for as long as you wish. You retain the title and continue to be the homeowner. By not having regular repayments, there’s no risk of defaulting. Also, the lender can’t forcibly remove you from your home.
There are simple obligations you need to meet, though. You have to live in and maintain your home and pay the home insurance and rates.
2. You could end up owing more than your home’s worth
This myth is debunked! It won’t be a possibility because of the “no negative equity guarantee” (NNEG) clause in the National Consumer Credit Protection Act. With NNEG‘s introduction in 2012, you are protected by law. You cannot owe more than your home’s worth, regardless of what happens to its value.
3. You’re-disinheriting-the-kids Myth
This myth is not true. As people live longer, bequests are delayed beyond the time your children need financial help the most. You can help your kids by using the equity of your home. Rather than wait until death, choose the timing of a bequest, which is a more desirable option for the whole family.
4. Reverse mortgages are last resort
Again, this myth is false. The government recently identified the family home as part of the ‘third pillar’ of retirement funding. More than their super, most retirees have their savings in the family home.
Products like reverse mortgages allow you access to the savings in your home to elevate your wellbeing and lifestyle in retirement, without the need to sell your home. Reverse mortgages are increasingly refined to provide you with flexibility and options, capital and income, to improve your retirement funding.
5. The myth that nothing will be left to cover aged care costs
The loan amount you can borrow is based on the loan to value ratio or LVR, which is calculated using the age of the youngest borrower and the value of your property. The LVR for an equity release such as a reverse mortgage is conservative. As an example, the LVR for a reverse mortgage for those aged 60 starts at 15 per cent. It then increases one per cent annually thereafter.
The benefit is if you need to move into aged care in later years, there should be enough equity to cover costs like accommodation deposit or daily fee when required.
6. Getting equity from your home by downsizing is better
Usually, most senior Australians are reluctant to downsize, identifying their current home as optimal. Along with financial costs, moving from your home and the community you have grown to love over the years can have social and emotional effects. Also, selling up may have an impact in your Age Pension entitlement.
7. You already have a mortgage so you can’t get a reverse mortgage
ASAG regularly refinance mortgages as well as reverse mortgages. Traditional bank mortgages have to be repaid monthly, which can affect your retirement cash flow. You’re also risking yourself to default if you are not able to meet those repayments. By refinancing with a reverse mortgage, you don’t run the risk of the bank foreclosing and can free up your retirement income.
If you liked our “7 Reverse Mortgage Stigmas – Myth or Fact?” and took away some useful information, check our blog space regularly for more updates on reverse mortgages and equity releases.