As the average age of the Australian population increases, more and more people are looking to alternative ways to bolster their financial capacity later in life. One way to achieve this is through a reverse mortgage, which allows homeowners to capitalise on the equity in their home in exchange for either a lump sum payment, or a more streamlined income source over time. Just like any other mortgage, interest is applicable to a reverse mortgage, and is usually higher than that of a standard home loan. That being said, this type of facility helps to increase your overall income during retirement, whilst still maintaining ownership of your home, as well as benefiting from any increase in value your home gains over time. 

How is interest charged on a reverse mortgage?

 Interest is charged in the same way that a standard mortgage interest rate is applied. The amount of interest that is paid over time is dependent on the total amount of the reverse mortgage that is taken out, and the length of time the facility is active. Usually, a reverse mortgage can be in place until:

1.  The home is sold.

2.  The transfer of your homes title in the event of an estate transfer.

Why are people taking out reverse mortgages?

Many retirees are looking for ways to subsidise their income for a number of different reasons. One of the most common reasons is to help pay for the costs associated with moving into aged care homes. Since 2014, the Living Better Living Longer reforms came into play, which means that people who are needing to move into aged care are usually required to enter into one of the following arrangements.

1.  Refundable Accommodation Deposit

2.  Daily Accommodation Payment

In either case, a reverse mortgage gives home-owners access to additional capital to be able to pay for the RAD or DAP, without impacting the financial position of their loved ones. This also allows the homeowner to make good use of the equity they have in their home, without having to sell the asset and lose potential increases in value during their time in aged care.

When is the right time to take out a reverse mortgage?

 This is highly dependent on a number of factors including:

1.  Your current age and health.

2.  Your intentions for passing on your estate to loved ones.

3.  The current value of your property.

4.  Your financial position beyond the value of your home.

 We have been helping older Australian’s to evaluate their options when it comes to financial planning for their later years, including finding the right reverse mortgage options to suit their needs. The truth is, every case is different and will need to be assessed on a case by case basis. If you are interested in learning more about how a reverse mortgage could help improve your financial position during retirement, then book an appointment with one of our mortgage experts.

How much interest will I have to pay?

This is dependent on the total principal amount borrowed, as well as the fluctuation in interest rates and length of time the facility is active. A mortgage expert will be able to help you model different scenarios over time so you can get a solid understanding of how much interest will be owed at the end of your reverse mortgage.

Will I have to pay more than my home is worth at the end of the reverse mortgage term?

 In the majority of cases, no.

 By law, banks and financial institutions must provide a contracted guarantee that your final repayment of a reverse mortgage will not exceed the value of the home that is used as equity.

 Will I still be able to leave my home to my family when I pass away?

 If there is residual equity left in your home after you pass away, then the remaining amount after the sale will be returned to the estate and distributed as per your Will’s instructions.

Will the income I receive from a reverse mortgage affect my pension of other benefits?

 For Australian’s who are entitled to a pension, the income received from a reverse mortgage may affect your pension, as the exemption that applies to the value of your home with regards to means testing does not carry over and apply to the income earned from a reverse mortgage. Anyone who is considering taking out a reverse mortgage should contact both a mortgage broker as well as Centrelink in order to get a complete understanding of the long-term impacts that a reverse mortgage will have to your pension and other benefits.

How do I find out more?

If you are interested in learning more about how a reverse mortgage could help you unlock the equity in your home and improve your standard of living as you age then reach out to one of our mortgage experts for a free consultation. We have helped thousands of Australians to navigate the complexities of various loan products, and helped them understand the impacts and benefits that different types of home loan products offer. 

Bernie Kyne
Mortgage Consultant
0400141757
bernie.kyne@mortgage-express.com.au