REVERSE MORTGAGE INFORMATION FOR AUSTRALIAN BORROWERS
Reverse Mortgage Loans in Australia - Information, money saving tips and commentary

Reverse Mortgage in Australia



The best place to start your home loan search

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 mortgage 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. The best place to start your home loan search

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.


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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 (June 2016):
  • Monthly fee NIL
  • Annual fee $150
  • Redraw fee $100
7.95% std. variable

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