Reverse Mortgage Home Loan
Features of Reverse Mortgages
The Reverse Mortgage enables people over 65 to borrow funds using the equity in their home, while still being able to live in the home.
If the borrower moves out of the home or dies the borrowed amount plus interest becomes due.
Most Reverse Mortgages have a variable interest rate about 0.5 - 1% higher than a standard mortgage. Especially in an environment of
rising interest rates, borrowers need to be aware that the compounding effect of interest charges and fees capitalising can cause the loan to balloon
to unforeseen levels in a very short period of time. For example, at an interest rate of 8% per year a $50,000 loan could become $86,000
in 7 years or $108,000 in 10 years. At 9% a $50,000 debt would become $92,000 in 7 years and $119,00 in 10 years.
If interest rates rise by a further 2% over 10 years then a $50,000 debt becomes an $162,000 debt. At a 4% increase, $50,000 becomes
$177,000. It is not difficult to see how some US and UK retirees have lost their homes through similar mortgage schemes.
Another possible factor to consider is a deflationary environment - where houses actually decrease in value.
Some of the features of a typical Reverse Mortgage 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
Benefits of a Reverse Mortgage
- Allows asset rich, but income poor, home owners to release money tied up in their property.
- Draw down funds as required rather than as one lump (depends on lender)
- The redraw facilty if available means you have easy access to extra funds if required.
- No repayments required except for annual fee.
Effect on Government Support, Aged Pension etc...
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 this type of finance. The Financial Information Service
of Centrelink offers free, expert advice on entitlements and how to maximise your pension.
Tips and strategies
- Shop around for the best interest rate
- Investigate the impact on your Centrelink benefits before committing to loan
- Plan your withdrawals to mimimise redraw fees
- Consult with your family before taking out a Reverse Mortgage
- Seek independent financial and legal advice
- Ask the lender what happens if your home decreases in value
Example Rates and Fees
Reverse Mortgage - Variable Interest Rate (July 2008):
- Monthly fee NIL
- Annual fee $150
- Redraw fee $100
9.95% std. variable
You can apply over the Internet and ask the Home Loan Club for a free
no-obligation quote on a Reverse Mortgage.
Thank you for visiting our Reverse Mortgage web-page. We hope the overview has proved useful.
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