reverse mortgages
A "reverse mortgage" loan is aimed at retired people who own their own home but have little cash to live on. This style of loan allows the cash-poor, asset-rich to tap into the value of their property without having to sell it. No repayments are required during the loan term with the total interest, fees and charges being taken out of the estate on the borrower's death.
Although borrowings are limited to a small proportion of the overall value of the home, borrowers should realise that the mounting debt on the home during the term of the loan erodes the owner's increasing equity from rising property values. This means there will be less available to pass on in their will. If property prices don't rise at all, equity will fall. Someone borrowing $100,000 at 8 per cent will have to pay back $220,000 in interest and principal after 10 years, plus any fees.
We are fully accredited to introduce Seniors loans offered by
• CBA
• Heartland Finance
• Bankwest
• St George Bank
Following is comprehensive information about reverse mortgages in general.
Whilst they seem "fairly straight forward", there can be significant ramifications and unintended consequences of taking out a reverse mortgage.
Therefore it is strongly recommended that you read the following "Reverse Mortgage Information Sheet" as prepared by ASIC.
In addition to the reverse mortgage calculator below there is a great calculator on the ASIC's MoneySmart Website. Visit -
www.moneysmart.gov.au/tools-and-resources/calculators-and-apps/reverse-mortgage-calculator
How much can I borrow?
Indicative maximum percentage of home's value that can be borrowed.
Reverse Mortgage Calculator
Reverse mortgages explained
A number of lenders now offer "reverse mortgage" loans for retired people who own their own home but have little cash to live on. They are termed "reverse mortgages" because instead of borrowing money to buy home, borrowers are using the home that they already own to secure borrowing to spend elsewhere.
This style of loan allows the 'cash poor, asset rich' to create a cash flow out of the equity built up in their home, without having to sell it. The beauty of the arrangement is that you can generate money to live on and still remain in your house.
No repayments are required during the loan term with the total interest, fees and charges being taken out of the estate on the borrower's death or sale of the home when they decide to move.
Being able to tap into the equity in your home allows you to purchase goods you may have had to do without because of lack of funds. For example, a new car, holiday or even to pay for house repairs. This is especially beneficial if you do not have many assets outside the family home to draw on to pay for these.
Joint owners
If you live with a partner or spouse and you're joint owners of the house, the reverse mortgage would be in both names so your home is protected as long as one of you lives there. If only one of you owns the house, be warned: the loan will only be in one name so it will have to be repaid when the partner who owns the house dies or moves into residential aged care.
However, there are plenty of issues to consider before you decide to sign up.
Eroding the value of your home
While the concept of a reverse mortgage is tempting they are not for everyone. Although borrowings are limited to a small proportion of the overall value of the home, borrowers should realise that unless the rate of growth in property values is high, the borrower will see their equity in the asset being eroded each year, leaving less available to pass on in their will.
Interest is capitalised onto the loan and builds up each year so that eventually the debt amounts to a lot more than the original loan. For example, someone borrowing $100,000 at 8 per cent will owe $220,000 in interest and principal after 10 years, plus any fees. While repayment is not required by the borrower while they remain alive and living in the home, it must be repaid eventually, usually out of the estate upon death.
What about the children?
One thing to consider - if it is important to you - is that you will have fewer assets to leave to your children. Unless you sell your property and pay back the loan prior to your death, the beneficiaries of your will may be left with a property that has an outstanding loan secured against it. This may come as a shock if it wasn't expected, and your beneficiaries may find it difficult to deal with this as well as the grief of your death.
The following excellent information has come from the ASIC ( Australian Securities & Investments commission) FIDO website. www.fido.gov.au/equityrelease
How reverse mortgages work
Reverse mortgages allow you to borrow cash against the value of your home. You usually don't have to make regular repayments until you leave and move into care, sell your home or die. When the loan ends you, or your estate, must repay what's owing, usually out of the proceeds of the sale of your home.
Each year the fees and interest you would ordinarily pay are added to the loan balance. Over time, you're charged interest on the interest (or compound interest) and that builds up the total amount you owe.
There is a risk that the amount of the loan may increase to a point where it is more than the value of your home. This is called ' negative equity' .
Some, but not all, reverse mortgage products guarantee that if this happens, you will not have to repay more than the value of your home (a no negative equity guarantee ). But you may lose this protection if you don't meet the terms and conditions of the loan for example, if you don't repair and maintain your home to a standard set by the lender.
You should be eligible for a reverse mortgage if you are 60 years or older and own your own home. You'll usually be able to borrow between 15% and 40% of the value of your home, depending on how old you are The older you are the more you can borrow. In the case of couples who are both owners of the property, the amount you can borrow is based on the age of the youngest borrower.
What are the benefits?
- You can access cash as a lump sum, a regular stream of income or a combination of both to suit your needs.
- You don't need a current income to qualify.
- You get to stay in your home and keep ownership.
- You usually don't have to make any regular repayments while you live in your home.
What are the costs?
- Interest rates are usually higher than average home loan rates.
- Because the interest builds up (or compounds) over the term of the loan, the debt can rise quickly, to the point where it may even be more than the value of your home.
- You may have obligations that become quite onerous, especially as you get older - like maintaining the property to a standard required by the lender. If you don't meet these obligations, you may lose your no negative equity guarantee and the lender may be entitled to evict you.
- If you are the sole owner of your home and you move or die, anyone who lives with you may not be able to stay in the home with you.
- The loan may affect your eligibility for a pension.
- There is no way to know for certain how much you will owe at the end of the loan.
- You might not have enough money left over after the loan to pay for aged care accommodation or to leave an inheritance (although some products do allow you to protect a fixed percentage of the value of the property so it cannot be used to repay the debt).
Warnings
- If you take up a reverse mortgage with a fixed term you may have to sell the house and repay the loan in your lifetime.
- If you take up a product that does not contain a no negative equity guarantee, you may have to meet the shortfall if your debt amounts to more than the value of your property.
Case studies
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Roberta makes it work for her |
Here's a basic worked example of the cost
Our table shows how your loan could double in less than 10 years, just through the force of compound interest. If interest rates increase (with a variable rate loan) you could end up owing even more.
Kim is 70 years old and decides to borrow a lump sum of $100,000 at an interest rate of 8.32% per year. Kim's home is worth $400,000. Here's what Kim could owe at the end of various periods.
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Number of years since Kim took out the loan |
Here's what Kim's home may be worth if housing values increase 3.5% every year |
Here's what Kim or Kim's estate could owe if the interest rate is 8.32%* |
And here's what Kim could owe if the interest rate increases to 11%** after the first 2 years |
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5 years |
$475,000 |
$154,000 |
$167,000 |
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10 years |
$564,000 |
$234,000 |
$290,000 |
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15 years |
$670,000 |
$356,000 |
$502,000 |
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20 years |
$796,000 |
$540,000 |
$869,000 |
All figures rounded to nearest $1000
*assumes 8.32% interest applies throughout
**assumes 11% interest starts after 2 years and then applies throughout
Tips for picking the right product
- Keep in mind our tips about things to consider now and in the future and getting independent legal and financial advice .
- FIDO also has a reverse mortgage calculator that you can use to get an idea of the cost implications of decisions you make about how much you borrow, how long you borrow for, and the impact of interest rates and various fees. You should be cautious about calculators provided by reverse mortgage providers. Some of these calculators will generally only show how much you can borrow and not how much you have to repay.
- Use our reverse mortgage checklist below to make sure you consider relevant issues.
Reverse mortgage checklist
ABOUT YOU |
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Current and future financial needs you should think about |
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What are your other options? |
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ABOUT THE LOAN |
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What are the age and eligibility criteria for the loan? |
With most loans, you should be able to borrow more, the older you are. For couples, the amount you can borrow depends on the youngest borrower's age. Some lenders may be choosy about the properties they take. |
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Will there be money left over? |
Some products allow you to protect a fixed percentage of the value of the property so it cannot be used to repay the debt. |
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Can the loan exceed the property value? |
Check if there is a no negative equity guarantee . This can protect you if the value of the loan exceeds the value of the property, because lender agrees to bear the cost if this occurs. |
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Has the property been independently valued? |
The valuation of your home will determine how much money you get so make sure it's an independent valuation. |
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What about rates, insurance and maintenance? |
Most products require you to pay rates, maintain and insure your home. Maintenance can be costly over time. And as you get older, you may find it difficult to maintain the property in the same way you had done previously. |
INTERESTS AND COSTS |
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What are the costs? |
Costs can include establishment and ongoing fees, and home valuation costs. If these fees are added to your loan, interest is charged on them, which compounds (or builds up over time). |
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What is the interest rate? |
Interest rates are generally higher than for traditional home loans and differ between products. |
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Fixed or variable interest rate? |
A fixed rate usually costs more and a higher fee may apply if you pay off the loan early. If you are worried that interest rates will increase, you may wish to lock in a more favourable long term rate. |
ABOUT PAYMENTS |
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How are the funds paid? |
Funds can be paid as an upfront lump sum, regular monthly payments, a line of credit, or a combination of these options. Check which options are available? |
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What are the pros and cons of different payment options? |
You may be able to slow the growth of your debt by choosing regular payments instead of a lump sum, because you pay interest only on the amount you've actually withdrawn. Check with your financial adviser which option is best for you. |
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What will be the impact on your government pension? |
Payments can affect your pension entitlements. For more information talk to Centrelink Financial Information Service |
ABOUT YOUR LENDER |
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Is the lender financially sound and properly regulated? |
If not, there may be an increased risk that the lender may not be able to meet any long term promise to make payments. FIDO suggests you use a bank, building society, credit union or other prudentially regulated institution. These institutions are specially regulated to make sure that, under all reasonable circumstances, they can meet their financial promises. |
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Are there safeguards if something goes wrong? |
Ask the lender whether they are a member of an external dispute resolution scheme. See a list of ASIC approved dispute resolution schemes on the ASIC website. |
ABOUT YOUR RIGHTS |
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Can you cancel? |
Check if there is a cooling off period. |
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What if you breach the terms and conditions? |
You may lose key rights such as the no negative equity guarantee and the lender may have the right to evict you. Get a lawyer to check the fine print. |
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What if you want to move home? |
Check if the loan is portable. |
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Can the lender control what you do with your home? |
You are often required to live in your home and maintain it to a standard set by the lender. You may also need the lender's ok to sell, lease, renovate or vacate your home, or to have someone else live with you in your home. |
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What if a resident in the home is not a borrower on the contract? |
Only a few products protect the rights of resident non-borrowers. In other cases, they may have no rights when you die or leave the property. |
Protection against negative equity - FAQs
Q. Is there a no negative equity guarantee?
A. A no negative equity guarantee can protect you if the value of the loan exceeds the value of the property because lender agrees to bear the cost if this occurs.
Q. Are there any circumstances when the no negative equity guarantee will not apply?
A. If you breach any of the terms and conditions you may lose the no negative equity guarantee.
Q. Is there a way to ensure that some money will be left over when the loan is repaid?
A. Some products allow you to protect a fixed percentage of the value of the property so it cannot be used to repay the debt.
Disadvantages
The main disadvantages of reverse mortgages are they can limit your options in the future:
- You may not have enough money left to fund moving into a retirement village
- The value of your estate may be much less than anticipated because the debt increases over time
- If you take the loan as a lump sum it may have an impact on your eligibility for Centrelink payments.
Contract concerns
Many contracts are confusing and hard to interpret. We think consumers need to be very cautious when signing up:
- Wide-ranging default clauses. Borrowers can be in default for minor contract breaches. When you're in default the lender can require immediate repayment of the whole loan and may charge you a higher interest rate. This may lead to enforcement action and the sale of your house.
- The No Negative Equity Guarantee (lender covers any shortfall if your loan balance exceeds the proceeds from the sale of your house) sometimes seems to be so limited that it might not protect you at all.
- Some contracts are based on standard home loan contracts which include many limitations to your rights.
Quick guide to reverse mortgages
While reverse mortgages can help retirees supplement their income during retirement, there are pros and cons with such loans so make sure you seek appropriate independent advice. Here's a quick guide to the advantages and disadvantages of this type of borrowing:
Pros
- Suit 'asset rich, cash poor' retirees as they can tap into their biggest asset to fund living expenses and a better lifestyle.
- Borrowers can continue to live in their own house until they die or move homes permanently.
- There is flexibility so that loan money can be taken as a lump sum or as regular instalment payments.
- There are no repayments required until you die or sell the home.
- You can generally access around 10 to 45 per cent of the value of your home.
- Most products have a 'no negative equity' guarantee which means you won't end up owing more than the value of the home or be rendered homeless if its value drops.
- Their increasing popularity means more providers are offering them so the market is becoming more competitive.
Cons
- The interest charged is about 1 per cent higher than a standard variable rate.
- You must be of retirement age to qualify for one, generally 60 to 65 years old.
- They may impact on the borrower's eligibility for Centrelink payments so you may lose some of your age pension entitlements.
- They reduce the value of the estate so there will be fewer assets left for your beneficiaries.
- They limit future options for how the value of the family home may otherwise be used.
- They are typically sold to older consumers who have been recognised as possibly more vulnerable.
- They are not covered by the Financial Services Reform Act. Responsibility for regulating their sale rests with the State governments, rather than with Federal Government - although they do fall within the consumer protection provisions of the Australian Securities and Investments Commission.
- There is the potential for unscrupulous and unqualified operators to move into selling these products as they are not tightly unregulated.
Consider the following issues to ensure you understand how reverse mortgages work and what to look for when shopping for this type of loan:
In summary, the general requirements are:
- Usually, borrowers must be at least 60 years old.
- Borrowers can generally borrow between 10 to 45 per cent of the value of their home, depending on age.
- The interest charged is around 1 per cent higher than a standard variable home loan rate
Drawing on the loan and repayment
Under a reverse mortgage, while borrowers can receive the principal as an upfront lump sum, you can also choose to receive the principal in the form of regular part-payments from the lender over time.
You do not have to make any repayments - either principal or interest - to the lender during the term of the loan, although you do have the option of doing so if you wish. Instead, the entire loan, including accrued interest and any additional fees and charges, falls due on your death or when you move out of the mortgaged home permanently.
The lender then recovers the loan by either having the beneficiaries of your estate pay the debt, or by enforcing its mortgage and selling the home. In most cases, the lender will give your beneficiaries up to six months to repay the debt. If the lender sells the property, they will give any funds left over to your estate. Check these conditions on any loan you consider for suitability to your circumstances.
Non-recourse loans
One such consideration is the possibility you may lose your own home if property prices fall sharply and there is a sizeable debt built up from borrowings. Read How the economy can affect your reverse mortgage . While this is an unlikely occurrence, for peace of mind, consider taking out a reverse mortgage that is a 'non-recourse loan'.
A non-recourse loan gives a 'no-negative-equity guarantee' which prevents the mortgage provider from stepping in and taking your home away from you. That is, you will not become homeless if you end up owing more on the loan than the property is worth.
In the UK during the 1980s, thousands of retirees who took out such loans were evicted from their homes after rising interest rates and falling property prices saw the loan amount exceed the value of their homes.
Industry standards
Some of Australia 's providers of reverse mortgages have formed a not-for-profit body to oversee a voluntary code of conduct that is aimed at establishing safeguards for people that take out such loans.
The Seniors Australian Equity Release Association of Lenders (SEQUAL) has compiled a 10-point code of conduct designed to ensure that anyone seeking a reverse mortgage is provided with clear explanations of what these loan products comprise and all their likely implications.
As part of the membership, members have to ensure that their products have negative equity protection for consumers. This means that any scheme that has been endorsed by SEQUAL will provide protection from any further liability in the event that your loan balance exceeds the net realisable value of your property.
Go to the SEQUAL website.
Following is some further general information in relation to Reverse mortgages
How payments are received
Depending on the lender, borrowers can choose to receive monthly payments, a lump sum, a line of credit, or some combination.
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TIP: The line of credit offers the most flexibility by allowing homeowners to draw on their equity when needed up to the limit of the loan |
Maximum loan amounts
Maximum loan amount limits are based on the value of the home and the borrower's age and whatever the lender's policies are. Maximums range (depending on the lender) from 40% to 50% of the home's fair market value. The general rule is: The older the homeowner and the more valuable the home, the more money will be available.
Repayments on the reverse mortgage - seniors equity loan are generally not made until the residential property has been vacated or the clients sell. Interest Rates on the reverse mortgage can be fixed or variable or both, depending on the product and Lender / provider of choice. (Lifetime Fixed Interest Rates are usually offered by most Banks & Lenders).
Barrett lending solutions does not charge any upfront fees to clients seeking a Reverse Mortgage or Seniors Equity Loans. However, most Banks & Reverse Mortgage Lenders do charge an application fee and possibly a monthly fee, which will be passed directly on to the client.
Any associated legal fees and the complete cost of borrowing will be clearly explained by us at the time of the first appointment and will be included within the Reverse Mortgage - Seniors Equity Loan documents offered by the various lenders.
