Taking out a reverse mortgage on a home that you own can be a big financial help when you retire. Depending on your age, it can allow you to release up to 45 per cent of the value of your home to do things like renovate, travel, enjoy time with family and friends, or simply help you manage your cost of living. However, like any financial product, it pays to know what you should and shouldn’t consider to make it work for you.
THE DOS
DO research your options
First and foremost, you need to investigate if a reverse mortgage is the best financial option for you, or if you would be better off releasing capital by downsizing. Andrew Ford, CEO of specialist reverse mortgage lender, Heartland Seniors Finance, recommends people research the best option to suit their financial position.
“For customers wanting to weigh up the options, Heartland Seniors Finance has articles and videos on our website about reverse mortgages, and other options such as downsizing, to help you make an informed decision,” he says.
Key questions to ask when considering a reverse mortgage:
- How much capital do I need to meet my financial needs?
- Is a reverse mortgage or downsizing a better option for me?
- How would I like to receive my money over time?
- Will the loan affect my Age Pension?
- How much money can I borrow at my age?
- How will my decision affect my family?
- How long do I see myself living in my own home?
- What do I need to do to qualify for a reverse mortgage?
DO discuss it with your family and friends
A reverse mortgage is a lifetime loan and there is no requirement to repay it while you live in your own home. However, because the outstanding loan balance including interest is recouped when your house is sold, the beneficiaries of your will receive less when your estate is settled.
“Some people don’t discuss it, but when family members see that a reverse mortgage helps you manage with the cost of living, and provides you with suitable accommodation so that you can live independently, they are often highly supportive of your decision,” says Paul Dwyer, Adviser at Reverse Mortgage Finance Solutions.
DO keep up with your home maintenance
To remain compliant with your loan contract, you must continue to pay your home insurance and council rates, and keep your home in good condition.
DO disclose any existing debt to your mortgage broker
If you don’t, your mortgage broker will set up a loan plan that doesn’t take the debt into account. Interest on these debts could continue to accumulate.
Most of those debts will have higher interest rates than on a reverse mortgage — credit card rates of around 8.99-20.99 per cent^ compared with reverse mortgage rates of around 6.19-6.37 per cent*.
“It makes sense then to pay out all those existing debts with the lower interest rate on a reverse mortgage,” say Dwyer.
THE DON'TS
DON’T think that there is only one way to access the loan
You can opt to receive your money either as a lump sum payment, a cash reserve draw down facility (similar to line of credit), or a combination of the two. One other option is to have the money paid to you as a regular income, which can be combined with lump sum and reserve options.
“The flexibility of a reverse mortgage loan from Heartland Seniors Finance means that you can find a payment type that suits you,” says Ford.
DON’T forget to consider your funding needs
For example, you’ve calculated your renovations and travel expenses and you need to draw down $40K, but you decide to draw down $100K. If the remaining $60K stays in your bank account over time, you are paying compounding interest on the loan, the bank balance asset could affect your Centrelink entitlements, and this may also result in you needing to pay tax on the interest earned from the savings account.
Having access to funds from your reverse mortgage, without drawing it until you need it, could avoid these scenarios.
DON’T assume you will lose the Age Pension
Your Centrelink entitlements may not be affected by a reverse mortgage. This depends largely on your individual financial situation, asset test, and how you receive your money. Contact Centrelink to discuss your unique financial position.
Interested in learning more? Download a FREE e-book guide on reverse mortgage insights.
^Based on the Finder comparison site. *Based on CANSTAR 2017 interest rates.
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