Monday, December 06, 2004

Reverse Mortgage effect on pension in Australia

"If the Reverse Loan is drawn down in small (say, under $1000) amounts and not accumulated then it should not affect Government income or asset tests.

If however you take out larger amounts up to $40,000 and do not spend it all immediately then after 90 days you may be subject to deeming under the income test. Any amounts over $40,000 that are not spent immediately are automatically considered assets and subject to deeming.

We highly recommend you talk to your accountant, solicitor or someone from the relevant Government department to get up-to-date and more complete information relevant to your personal situation before you apply for a Reverse Mortgage. The Financial Information Service of Centrelink offers free, expert advice on entitlements and how to maximise your pension. "

Features of a Reverse Mortgage

"Some of the features of a typical Reverse Mortgage home loan include -
maximum amount is usually 11 - 45% of valuation
usually required to be taken as a lump sum
may allow you to redraw funds
can be used for any purpose
extra repayments allowed "

What is a Reverse Mortgage?

A Reverse Mortgage allows asset rich but income poor homeowners to borrow against the equity they have built up in their home without having to make payments on the principal or interest.

Property prices all over Australia have surged by more than 50% in recent years giving existing home owners substantial equity to use for securing a loan - Equity is the difference between what you owe on your home loan and what the property is actually worth (according to the bank!). Sometimes this type of loan is referred to as a Home Equity Conversion Loan.

The size of the mortgage that is available to you depends on the amount of equity you have in your home and you may be required to take it as a lump sum.

Reverse Mortgages are commonly used to repair or upgrade the home, take a holiday, or to purchase expensive items like a car.

The downside of a reverse mortgage is that it can double in size in as little as 7 years (or sooner in certain conditions) due to the compounding effect of capitalised interest rates and fees."