Reverse mortgage loans are in higher demand as Australian seniors look into borrowing against their home equity. Here are things to know if you plan to acquire this type of loan.
Australian seniors have been scrambling for income as the pandemic continues. They are looking into alternative solutions to access cash, such as early access to superannuation, downsizing, and considering equity releases.
Regulators like ASIC saw higher demand for reverse mortgages as retirees do their best to finance their lifestyle during these trying times. So, what are the things you have to know and consider before getting this loan?
How do reverse mortgage loans work?
A reverse mortgage is a solution for retired homeowners age 65 and over who have limited savings or assets. It enables those with low income to borrow against their home’s equity to improve their standard of living.
Reverse mortgages don’t require regular payments and moving out of your home because it is repayable when the property is sold. The loan amount that can be borrowed will depend on the age of the borrower, value of the property, and lender’s policies.
Ask if the lender will accept an investment property or a holiday home as security. This way, your primary residence can stay debt-free.
Fees and other costs
A reverse mortgage product usually comes with various fees. Some of which are:
- Upfront fees include application, settlement, and legal fees,
- Ongoing fees include any annual, fortnightly, or monthly fees, and
- Discharge fees include break costs and exit fees. Discuss with your lender about a cooling-off period, where you can get out of the contract if you change your mind. This period varies between states and territories.
Aside from these costs, you also have to pay for your loan’s interest rates. Reverse mortgage loans compound interest charged over the length of the loan’s term. This means as interest accumulates, the balance of the loan increases.
No negative equity guarantee
Negative equity protection, introduced in 2012 by the government, means the borrower cannot end up owing more than their home’s value.
When the loan contract ends and your property is sold, the lender receives the proceeds of the sale. You are not liable for any debt beyond it, except in situations like misrepresentation or fraud. You or your estate will collect the extra funds in the event your property sells more than the amount you owe.
What are the risks of obtaining a reverse mortgage loan?
As you consider borrowing funds against your home equity, you have to be aware of the risks it entails. Take a look at the following:
- With a reverse mortgage, the interest is capitalised on the loan, so you have to expect the interest compounding over time.
- Your children could have reservations over the loan as it may result in their shaved inheritance.
- If you’re the homeowner and you live with additional residents, they may not be able to stay in the house when the loan becomes repayable. Non-title-holding residents may have to move out if you die.
- Your partner or estate will have to deal with the loan when you pass away.
Think long and hard how this could have an effect on your pension entitlement as it involves financial responsibilities. It’s also better to consider how you would take your loan payments: a lump sum, line of credit, or regular installments.
If you’ve decided to go for a reverse mortgage, contact ASAG to further discuss this option with our friendly staff. You can also use the ASAG Reverse Mortgage Calculator and figure out if this suits you.
If you liked our “Reverse Mortgage Loans — Things to Know before Acquiring it” and found the information useful, check our blog space for more updates on equity releases and reverse mortgages.