How does a Reverse Mortgage work in Australia?
If you’re over the age of 60 and own your home in Australia, you might have heard about using a reverse mortgage to borrow money using the equity you’ve built up over the years.
With house prices rising at a much faster rate than income for a number of decades, three times the amount of people are carrying mortgages and other debt into retirement.
This is bad news for older Australians.
Reverse mortgages can be a useful tool to help you stay in your home, but there are also a number of risks involved. Make sure you understand all the pros and cons before making a decision.
In this blog post, we’ll cover the basics on what you need to know about reverse mortgages in Australia, including how they work, the benefits and drawbacks, and whether or not a reverse mortgage is right for you. Keep reading to learn more!
How does a reverse mortgage work?
Many retirees who own a home that has soared in value find they are asset rich but income poor.
Unlike a traditional mortgage, a reverse mortgage is a type of equity release product (ERP) that allows Australians over 60 to borrow money by using the equity in their home as security for the loan. With a reverse mortgage, you can choose to receive the funds as either a lump sum, a regular income stream, a line of credit, or as a combination of any of these options.
Because the loan doesn’t need to be repaid until all borrowers on the loan have either died, sold the house or moved into aged care, a reverse mortgage compounds the interest charged. This means the balance of the loan will continue to increase as the interest builds up.
Reverse mortgages are complex financial products
If you’re considering a reverse mortgage, make sure to speak to a financial advisor to see if it’s the right solution for you. While a reverse mortgage may cover your immediate expenses, you need to be aware of the long-term risks of the loan. Many people who take out reverse mortgages aren’t aware of those long-term risks.
According to regulator ASIC –
“Borrowers had a poor understanding of the risks and future costs of their loan, and generally failed to consider how their loan could impact their ability to afford their possible future needs.”
Before taking out a reverse mortgage, it is important to understand the impact it could have on your financial future and your retirement.
Moneysmart warns a reverse mortgage can impact your eligibility for the Age Pension, your capacity to afford aged care, your ability to pay for future expenses, the money you leave to loved ones when you pass away, and whether or not someone who lives with you can keep staying in your home when you move out or die.
There are a few things to consider before taking out a reverse mortgage.
If you’re considering a reverse mortgage, make sure you understand all of the risks involved. If you or someone you know is considering a reverse mortgage, we strongly urge you to seek professional financial advice first.
Want to know more about reverse mortgages?
ASIC’s MoneySmart website is a great resource to find out more about reverse mortgages, including a Reverse Mortgage Calculator to help you work out how much equity you may have in the future.
Visit the Australian Securities and Investments Commission’s free consumer website at www.moneysmart.gov.au