How does a reverse mortgage work in Australia?
Should you take out a reverse mortgage?
"Reverse mortgages can be an absolute disaster if used incorrectly, but in my opinion, they are incredibly valuable if used well," founder Paul Clitheroe wrote in Money.
"Obviously, the longer you leave getting one and the less you take out, the slower the growth in the size of your loan."
While you might already know the basics, others may not be so familiar. So, let's quickly discuss what a reverse mortgage is and its benefits.
What is a reverse mortgage?
A reverse mortgage is a type of loan that allows older homeowners to borrow against the equity in their home.
These types of loans differ from standard mortgages (where you make monthly payments to a lender), a reverse mortgage provides you with funds, either as a lump sum, regular payments or a line of credit, while you continue living in your home.
The loan is repaid when the property is sold, the borrower moves into long-term care or passes away. Like any major financial decision, it's important to consider the long-term costs and impact on inheritance before proceeding.
How does a reverse mortgage work in Australia?
We understand a reverse mortgage can seem complicated, but that doesn't mean it's not worth pursuing. To keep things simple, we've broken it down into four, digestible steps:
- Eligibility: You must be a homeowner (usually over the age of 60) and have built up significant home equity.
- Loan amount: The amount you can borrow depends on your age, property value and lender criteria. In most cases, the older you are, the more you can borrow.
- No regular repayments: Interest accrues over time and is added to the loan balance, meaning you don't have to make repayments while living in the home.
- Loan repayment: The loan is repaid when the property is sold, often after the borrower moves into aged care or passes away.
Key benefits of a reverse mortgage - why more older Australians are choosing them
Still on the fence about whether a reverse mortgage is the right thing to do for your finances? To help you make a decision, we've listed four key benefits of using a reverse mortgage in Australia:
- Access to home equity: This provides financial flexibility in retirement without needing to sell your home. These funds can also be drawn to cover other expenses, such as renovations or to clear other types of debt.
- No regular repayments: Unlike a standard mortgage, you do not have to make monthly repayments with a reverse mortgage, which can reduce financial stress for retirees.
- Stay in your home: A reverse mortgage means you can stay in your home while using its value for living expenses. For many older Australians, this removes the stress of having to move.
- Flexible payment options: Opting for a reverse mortgage gives you the flexibility to choose between one lump sum payment, regular income stream or a line of credit.
You can read more on the Moneysmart website. "This is a government site, not a sales pitch from a reverse mortgage company, so you will get unbiased information," Paul wrote.
Pensioners can contact the Department of Social Services and discuss the Home Equity Access Scheme, a government-backed reverse mortgage which offers up to 150% of the age pension as a fortnightly payment.
"This is exactly how a reverse mortgage should be structured. Frankly, they are just awful things if a large lump sum is taken out at a relatively early age from a lender who charges high interest. Compound interest works against you very badly if you have a large amount borrowed at high interest for many years.
"But most of us don't need a large lump sum; we want a regular amount to allow us to lead a better life, day to day. The great thing with small, regular amounts is that they don't build too quickly into a large amount."
Of course, deciding to pursue a reverse mortgage is only half the decision - the other half involves finding the right lender to assist you.
Reverse mortgage lenders in Australia - where to start
While reverse mortgage lenders in Australia are not as common as traditional mortgage providers, they do exist, offering financial solutions tailored to retirees looking to unlock home equity. Major banks previously dominated the market, offering a range of reverse mortgages, but today, specialist lenders and some non-bank financial institutions are also major players in this space.
To ensure you get the best bang for your buck, it's essential to compare options and seek financial advice before signing up to a reverse mortgage.
Speaking with a mortgage broker or a financial advisor who specialises in this area of lending can help you decide whether a reverse mortgage aligns with your retirement goals and point you in the right direction when selecting the best reverse mortgage provider for your needs.
You should also consider getting independent advice from a solicitor, and then discussing your plans with your family.
Learn everything you need to know about reverse mortgages in Australia with Money
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