If you are a homeowner over 60 and need extra cash, releasing equity in your home through a reverse mortgage is one of the possibilities to consider.
How does a reverse mortgage work in Australia? How much can you borrow? Is realising equity in your home a good idea?
Keep on reading to find out.
What Is a Reverse Mortgage?
A reverse home mortgage enables homeowners aged 60 years or over to access the equity in their home and use it as security for another loan.
Reverse mortgages are the most popular type of home equity release in Australia, and they are specifically intended for retirees who own assets but do not have a steady source of income.
How does a reverse mortgage work in Australia?
When you opt for a reverse mortgage, you remain the owner of the house, and you can live in it for as long as you like. You do not need to make repayments on the loan for as long as you reside in the property, but an interest rate is charged and added to your loan balance over time.
The loan must be repaid in full when:
- You sell the house
- Move out of the house
- You die and your estate sells the house.
There are no early payment fees and you can make voluntary repayments on the loan if you are able to.
How much can you borrow with a reverse mortgage?
Reverse mortgage lenders have strict criteria regarding loan-to-value ratios, determined mainly by the value of your home and your age.
Usually, the loan ranges from 15 to 20% of the value of the house for 60-year-old applicants, MoneySmart says. The amount you can access increases as you get older, so the maximum you can borrow at 61 is 21% of the value of the home. Add 1% for every year after 60 to calculate the size of the loan.
For instance, if your home is valued at $500,000 and you are 60 years old, you can borrow between $75,000 and $100,000. If you are 70 years of age, you can access between $125,000 and $150,000.
Lenders also have a minimum amount they are willing to lend—this is about $10,000 although it varies from one provider to the next. Other eligibility criteria may apply, so check with your lender to make sure you qualify.
If approved, you can receive the money you borrowed as a:
- An income stream paid out regularly in monthly or semi-annual instalments,
- A one-off lump sum
- A line of credit, which lets you access as much as you need
- A combination of all three.
How Much Does a Reverse Mortgage in Australia Cost?
The cost of the reverse mortgage loan you take depends on a few factors:
Note: If you’re interested in finding out the pros and cons of paying off your mortgage, check out this detailed guide.
- The amount you want to borrow
- The payment method
- Interest rate and fees
- The amount of time for which you’ll have the loan as interest accumulates over time
How much do reverse mortgage fees cost?
As with any home loan, a reverse mortgage is subject to certain fees and costs, ranging from
- Establishment fees: $500–$995
- Annual administration fees: $0–$12
- Loan discharge fee: $300–$400 (depending on how the loan is paid out, for example, taking the money as a lump sum will be more expensive as a result of compounding interest)
Keep in mind that if you want to increase your credit limit, subdivide the land and the house or introduce an easement onto the property you will need to pay extra.
According to Senior First, you should expect to pay between $1,500 and $2,000 in reverse mortgage loan costs. You can also use a mortgage calculator to check how much the loan will cost you in 10 or 20 years’ time.
What Should You Consider Before Taking Out a Reverse Mortgage?
Here are a few things to keep in mind when taking out a reverse mortgage.
Negative Equity Protection
The government introduced negative equity protection for all reverse mortgages taken out as of 18 September 2012. This stops borrowers from owing more than their home is worth.
When the home is sold and the loan balance is higher than the purchase price of the property, the borrower will not be required to pay off the remaining amount (unless there is fraud or misrepresentation involved).
If the house is sold for a higher price than the remaining loan balance, the borrower or their estate (if they are deceased) will receive the extra funds.
Risks involved
Negative equity protection is in place to ensure that you do not get into more debt than the sale of your home can cover. However, there are other risks involved with reverse mortgages including
To avoid these pitfalls, make sure you discuss your financing options with a professional advisor or a mortgage broker beforehand.
- Reverse mortgage rates are usually 2 to 3% higher than most home loans. With the cash rate rising and its impact on home loan interest rates, you could end up paying a larger sum than you would expect.
- The amount of money you owe can increase rapidly
- Your savings might not be enough to pay for aged care if you are forced to sell your home
- If the people who live with you aren’t registered as co-owners, there’s a possibility that they will be forced to move out when you die
- The loan you apply for may affect your Age pension payments so make sure you contact Centrelink before applying for a reverse mortgage.
The fine print
Here is a list of the things you must check and double-check when taking out a reverse mortgage loan.
Reverse mortgage information statement and projections
Before you take out the loan, the lender will discuss all the costs and fees with you and show you how a reverse mortgage will impact the equity in your home.
It is crucial that you understand everything being presented to you at this stage. Talk to the lender again or an independent financial advisor, if you have any additional questions.
Special terms and conditions
Although limits on a reverse mortgage are not common, as retirees are free to use the loan as they will, there might be occasions when restrictions apply, so check with your lender before signing the agreement.
Be sure to ask about what will happen to your loan if:
- You are forced to sell the home earlier than expected
- Lease or vacate the home
- Transfer the loan to another house
- You die and there are other people living in the home (non-title-holding residents).
Make sure you have all the information before agreeing to the loan to avoid any unpleasant surprises in the future.
Reverse Mortgage Alternatives
A reverse mortgage is not the only way to access equity in Australia. Here are some other options available.
Equity Release Agreement
An equity release agreement allows you to tap into some of the equity in your home by selling a portion of it to a property investment fund. You will still continue to live there, but you will pay fees on the portion of the home that is sold. The fees are deducted from your remaining equity in the property—this way, the investors’ share in your house goes up, while yours goes down.
Home Equity Access Scheme
This program, provided by Centrelink and the Department of Veterans’ Affairs, allows older Aussies to get fortnightly loans by using their home as security. The loan is then used to supplement your and your spouse’s pension income.
Home sale proceeds sharing (home reversion)
A home reversion enables the homeowner to sell a proportion of the home’s future value while remaining to live on the property. You will relieve a lump sum payment with no interest (since this is not a loan), but there will be transaction costs to cover.
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Bottom Line: Is a Reverse Mortgage a Good Idea?
A reverse mortgage can be a viable option for seniors who are “asset rich, but cash poor”. You can continue to live in your home and there is no need to repay anything until the property is sold.
That said, a reverse mortgage is a loan, so it will have to be repaid eventually. And if the overall cost of the loan (the interest accrued over time, the principal and fees) is not lower than the sale proceeds, you risk leaving your children and family without an inheritance.
It would be best if you discuss the pros and cons of a reverse mortgage with a professional who will be able to advise you on whether or not this financing option is the way to go.
1. Who is eligible for a reverse mortgage?
In order to qualify for a reverse mortgage, you need to be over the age of 60. Some lenders might have other qualifying criteria, so check with several mortgage providers to see whose eligibility standards you can meet.
2. Which banks offer reverse mortgages in Australia?
As of 2019, none of Australia’s biggest banks offers reverse mortgage services. However, there are still many smaller banks that do. The best option would be to contact a licensed mortgage broker who can explain everything in detail and connect you to lenders.
3. How do I repay a reverse mortgage?
You need to repay the loan in full (interest and fees included) when you sell the home, move out or when you die and your estate sells the property. The proceeds from the sale will be used to repay the loan—if the balance is lower than the purchase price of the home, you or your beneficiaries will receive the remaining amount.
Since there is a negative equity guarantee in place, the money you owe on the loan cannot exceed the value of the home.
4. How does a reverse mortgage work in Australia when you die?
When the borrower is deceased, the loan should be paid for in full by the estate, which means the property will be sold and the funds raised used to pay for the reverse mortgage in full.
