Reverse Mortgages – What are they and are they right for me?

Reverse mortgages are gaining significant popularity amongst those over the age of 60 in Australia. Whilst they provide a potentially attractive option to convert home equity into cash there are a number of factors that should be considered before deciding if a reverse mortgage is the right option for you.
To provide some context on the growth of reverse mortgages in Australia, Heartland Bank who is Australia’s leading provider of reverse mortgages (over 40% market share) recently reported a 20% increase in applications for reverse mortgages in the 23/24 financial year.
Whilst the increase in the take up of reverse mortgages is due to a number of factors, it is generally indicative of the rising cost of living and the growing ‘asset rich cash poor’ reality that many Australians find themselves in once they have retired.

So what is a reverse mortgage?

Put simply, a reverse mortgage lets homeowners turn the value of their home into cash. It works by allowing them to borrow money based on the equity they’ve built up in their home.
Reverse mortgages are generally:

1.  only available to those over the age of 60; and
2.  only able to be taken out against a borrower’s principal place of residence (which must be debt-free at the time the mortgage is funded).

Reverse mortgages are generally capped at 20-25% of the current value of the property but the exact amount which can be borrowed will depend upon a range of factors including the age of the borrowers and the current/predicted value of the mortgaged property.
Depending upon the age of the borrowers and the lender’s policy, the amount which is borrowed may be able to be taken as one (or a combination) of the following:

1. a regular income stream;
2. a line of credit; or
3. a lump sum.

Unlike traditional mortgages, reverse mortgages have no mandatory regular repayments. Full repayment of the principal amount (plus interest, fees and charges) is generally only due on the first of the following to occur:

1. the death of all borrowers;
2. all borrowers ceasing to live at the mortgaged property; or
3. the sale of the mortgaged property.

Is a reverse mortgage right for me?

Positives of a reverse mortgage

1. Reverse mortgages provide you with cash flow and may allow you to retain ownership of your home for longer, fixing the balance of being asset rich but cash flow poor.
2. Reverse mortgages usually don’t require an assessment of your income and generally don’t impact the receipt of any government payments or benefits you are receiving (Note this is not true in all circumstances and you should receive independent financial advice on the individual financial impacts of a reverse mortgage before proceeding).
3. All reverse mortgages taken out after 18 September 2012 come with a ‘negative equity guarantee’. This means that in the worst-case scenario the maximum amount which can be taken by the lender at the end of the mortgage is the value of the mortgaged property.

Negatives of a reverse mortgage

• Over time, your debt will grow while the interest is compounding, and the equity in your home will decrease.
• The interest is usually set at a higher rate than a standard mortgage.
• Reverse mortgages often limit who can permanently reside in the mortgaged property and it is generally only the listed borrowers and their spouses who can reside in the property. Owners generally must also get written approval from the lender before leaving the property for an extended period (such as for a holiday longer than a few months).
• Reverse mortgages can impact on your ability to afford aged care or purchase a new home.
• Taking out a reverse mortgage can significantly impact the value of your estate. For this reason, it is always recommended to consider the impacts a reverse mortgage may have on your loved ones and to ensure you have an appropriate estate plan in place before proceeding.
• Reverse mortgages could significantly impact, any future applications for other loans or financial products.

How can we help?

As a mandatory condition of all reverse mortgages, borrowers must receive independent legal advice on the nature and effect of the reverse mortgage documents before signing.
We regularly assist clients with this advice and are well placed in each of our offices to provide thorough but timely legal advice on the individual risks and obligations of signing up to a reverse mortgage.
We are also able to assist clients with any estate planning needs and this includes advising those considering a reverse mortgage on the effects it may have for their estate.

Please note that the advice provided in this article is of a general nature only and anyone considering a reverse mortgage should seek appropriate legal and financial advice which takes into account their individual circumstances and the particular mortgage products they are considering.