What do you do if you are over 60 without a regular source of income other than the pension as you have retired and find that you have to fund urgent renovations to your home? Or unexpected medical expenses? Or you would like to refinance high-interest credit card debt or other liabilities?
As you are no longer employed earning a regular wage, it is almost impossible to access traditional finance. You may however own your own home so you are effectively “asset rich but income poor”. What a reverse mortgage allows you to do is to access part of the equity in your home. The amount you can access will depend on your age and anticipated life span. There is no expectation that you pay it off until you either sell the property or pass away.
Given that there is no requirement to pay it back until after your death or sale of the property, it does mean that the interest payments capitalize which will mean that over time, the amount you have to pay may be significantly more than what you borrowed initially. While the amount of the mortgage debt will continue to increase, over time the value of your home should also continue to increase which helps to ensure that the debt does not exceed the value of the property itself. However, this may not always be the case.
To further ensure that your debt does not exceed your equity, consumer protection legislation came into effect in 2012 to provide a no negative equity guarantee which means that you will never owe more than the value of the home.
While there is no requirement to pay the loan back during your lifetime, you can choose to make voluntary payments towards the loan balance with a view to reducing the amount of interest payable or even paying it off completely.
One issue to bear in mind are your future care needs. If your health declines and you are no longer able to live independently in your home, you will need to look to move into an aged care facility. There is often quite a high upfront cost to enter these facilities so you will need to ensure that there will be sufficient funds available after selling your home and clearing the mortgage to still allow you to secure a spot in an aged facility if required.
There are only a handful of borrowers offering this type of product, the interest rate is often higher than a standard mortgage and there can be significant fees associated with setting it up. While a reverse mortgage can offer you the flexibility you need in your retirement, you do need to be aware of the risks associated with this type of lending prior to committing to proceed.
If you are considering entering into a reverse mortgage, it is critical that you speak with your financial adviser to ensure that this product will be beneficial to you.
It is equally critical to speak with your solicitor so that they can explain the terms of the loan agreement to you so that you are fully informed and understand how it works prior to proceeding.
