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Reverse mortgages

Information about equity release mortgages with deferred repayment

A reverse mortgage is an equity release product that allows asset-rich, cash-poor retirees to borrow a percentage (usually between 10-45%) of the value of their home to fund their retirement. The money can be paid to the borrower as either a series of instalments, a lump sum or a line of credit that can be drawn down at leisure.

To be eligible to obtain a reverse mortgage, you must be of retirement age (at least 55 years of age).

There is no requirement for repayments to be made while you continue to live in your home, but as soon as you sell your home, move into an aged care facility or pass away, the loan balance (inclusive of interest that has compounded over the life of the loan) becomes due and payable.

Before you obtain a reverse mortgage

  • Deciding whether or not to take out a reverse mortgage is a complex matter and involves consideration of your health, your probable lifespan, your changing lifestyle and more. Refer to ASIC's reverse mortgage checklist for more information on determining whether a reverse mortgage is right for you.
  • Discuss the pros and cons with your family members.
  • Before signing anything you should get advice from an independent solicitor and financial adviser who understands reverse mortgages.
  • Think about how your needs and lifestyle will change over time and whether your obligations under a reverse mortgage will pose too much of a burden.
  • If you intend to leave an inheritance or move into long-term aged care, consider purchasing an equity protection product. These products enable you to protect a proportion of the value of the property so that no matter whether your house value rises or falls, you will have this percentage left over once the house is sold.
  • People receiving Centrelink payments may lose part or all of their entitlements if they take out a reverse mortgage. Under Centrelink's income and assets test, the amount of money you withdraw and how quickly you spend it will determine whether or not your age pension entitlements will be affected.
  • Check that the reverse mortgage provider you choose belongs to an external dispute resolution scheme. This means that, if you are unhappy with the product or service provided, you can seek a solution or compensation from a qualified, independent body. (All SEQUAL Members are affiliated with an external dispute resolution scheme).
  • Check that your loan is transferable to another property if you choose to downsize and move into a smaller residence.
  • Check the length of time that is granted after the home-owner dies or takes up residence in an aged care facility before the house has to be sold or the outstanding loan balance has to be settled.
  • Consider taking out a reverse mortgage which allows you to withdraw small sums of money as required. In this way, you will only have to pay interest on the amount withdrawn as opposed to the amount of interest associated with a large lump sum withdrawal and consequently, slow the growth of the loan balance.

Beware

  • Due to interest being compounded over the life of the loan and no repayments being made, there is a risk that the loan balance could eventually exceed the value of your home. This is called 'negative equity'. Make sure that the reverse mortgage you choose comes with a 'no-negative equity guarantee' so that you will never be liable to pay more than the net realizable value of your property.
  • Bear in mind that in some cases you can lose the 'no-negative equity' safeguard if you fail to fulfil certain terms and conditions of the loan, eg not maintaining the house and surrounds to a suitable standard. Fulfilling such obligations could become quite a burden as you get older.
  • Reverse mortgages often contain wide-reaching default clauses - you could be in default simply for submitting paperwork late. If you 'default', the lender may be authorized to request immediate payment of the entire loan balance and may impose penalty charges until such time as it is paid. In addition, the lender may initiate proceedings to sell your home.

Pros

  • Reverse mortgages provide asset-rich, cash-poor persons with access to money where other sources are not available.
  • A reverse mortgage enables a borrower to access funds while continuing to live in their home and to retain ownership.
  • To be eligible for a reverse mortgage, there is no requirement to provide evidence of a current income.

Cons

  • Reverse mortgages, on average, contain an interest rate 1% higher than the rate charged in a standard variable rate home loan.
  • You will have to abide by the lender's requirements on a range of matters. For example, you may need the lender's permission for someone else to come and live with you in your home, to sell, lease or vacate your property; or to make modifications to the property such as the installation of a wheelchair elevator or ramp which may reduce the property's value.
  • If you pass away or decide to move to a new place of residence and the property is only in your name, your spouse or co-resident may not be allowed to continue to live in the property unless they pay the outstanding loan balance.
  • If you take out a reverse mortgage, your estate will be diminished and hence your capacity to buy into a retirement village/hostel may be affected. Additionally, the value of the assets left for your beneficiaries/family members will be reduced.
  • Your loan balance can double in less than ten years. To view a worked example of how quickly the loan balance can increase, visit ASIC's reverse mortgage case studies.
  • It is not possible for you to accurately calculate the amount of the loan balance before the end of the loan term.

SEQUAL

In an effort to self-regulate, several Australian reverse mortgage providers have banded together to form the Senior Australians Equity Release Association of Lenders (SEQUAL). SEQUAL Members must abide by a ten-point Code of Conduct, the purpose of which is to establish basic protections for consumers that obtain an equity release product.

Is a reverse mortgage an investment opportunity?

  • Taking out a reverse mortgage to deposit the money into a bank is not advised since there is a slim chance that the interest gained will match let alone exceed the interest accumulating on your loan.
  • Similarly, using the money for investment purposes is considered an unwise and highly risky venture because there is no way of knowing whether your investment return will outweigh the interest on the loan. In addition, your loan will not be covered by the Consumer Credit Code if the proceeds are to be used for investment purposes.

Alternatives

  • Selling your home and downsizing to a smaller residence.
  • Holding off from obtaining a reverse mortgage until you are a bit older so as to preserve your nest egg.
  • Finding alternative sources of funds or deferring spending. 

For more information, see the Reverse Mortgages for Seniors brochure.