Reverse mortgages presently allow people of age 60 and above to borrow money against real estate assets, usually their home, and repayment is not required until they sell or vacate the property or they die. In the case of couples, the age of the youngest owner or resident of the property is taken into account.
The amount that can be borrowed and the features and conditions of the products vary from provider to provider. It is vital that the borrower/s understand the conditions of the loan. Generally independent legal advice must be obtained before the loan will be approved. In some cases product providers require independent financial advice to be sought as well. This can be both difficult and, when possible, expensive. A solicitor or an accountant should be able to sign the document required in relation to financial advice.
Fees and charges are usually added to the loan amount and interest calculated on the outstanding balance and compounded. The effect of compound interest on the loan balance can be significant. Where a person borrows $30,000 gross (including application fee), assuming a fee of $10 is charged monthly and the loan interest rate is 8.5% fixed, at the end of 10 years the debt would have grown to approximately $71,860. Depending on the growth in the value of the property, this could significantly reduce any legacy to beneficiaries.
Most providers offer a “no negative equity guarantee” which means that in the event of the property selling at a price lower than the balance of the loan, neither the borrower/s nor their estate (if applicable) will be called upon to make up the difference. It is important to know and understand the default clauses on the loan because being in default can void the “no negative equity agreement”. Some of the default clauses include not having paid the rates on the property or not having adequately maintained the property, among others.
A calculator on the consumer website MoneySmart established by the Australian Securities and Investment Commission (ASIC), shows how debt can build up and may affect how much of your home you still own as time goes by. The MoneySmart reverse mortgage calculator shows the effect on the equity in your home based on decisions you may make about:
- How much you borrow
- Whether you take an initial lump sum, arrange regular payments or a combination of both
- How long you borrow for
- Interest rates and various fees
- Changes in home values
Proceeds of the loan may be received as a lump sum, as regular monthly payments or as a “line of credit” depending on the provider. Interest rates may be variable or fixed.
The MoneySmart site also has tips on understanding equity release products (including reverse mortgages) and the questions to ask before you commit to one.
The MoneySmart website also has tips on Reverse mortgages and home reversion schemes. For more information, please click here.
Reverse mortgages are available in South Australia from a wide range of financial providers.