Reverse mortgages are becoming more popular as recognition grows among Australia’s seniors that they are living in homes that are rich in equity, even if they are strapped for cash.
However, while reverse mortgages are an excellent financial tool for the retired single or couple in principle, there are pitfalls for the unwary.
Ideally a reverse mortgage, a financial product that allows you to borrow money against the value of your home, can be an important helping hand for people wanting to access additional cash, perhaps to meet health costs or even to enjoy a little travel.
No free lunches
For some people, reverse mortgages can make sense but there are no free lunches. If you are living in a house that is worth many times what you bought it for, and you don’t have relatives or aren’t concerned about leaving a sizeable inheritance, a reverse mortgage might offer some welcome relief to cash shortages. The important thing to recognise is that there can be significant ramifications and you must do your homework. This would certainly involve getting expert financial advice.
A reverse mortgage allows a cash-poor, asset-rich retiree, with no regular income, to access the value of their property without having to sell it or make loan repayments. The loan is repaid when the agreed loan period ends, or is taken out of the estate, along with interest, fees and charges upon the borrower’s death. But there can be catches.
How reverse mortgages work
Reverse mortgage interest rates are usually higher than average home loan rates and because the interest builds up over the term of the loan, the debt can grow quickly to the point where you actually have negative equity in your property. There might be other obligations as well such as upkeep of the property to the standards required by the lender, and it may affect your pension eligibility.
Typically, these sorts of mortgage products are only available to people aged 60 and up, but no income is required in order to be qualified to apply. Naturally, such a mortgage is secured for the lender via a first mortgage over your home. How much you can borrow will also be determined by the value of your property and the particular policies of your proposed lender.
Reverse mortgages are regarded as a popular and useful tool for cash-strapped seniors in the USA but the industry there is now highly regulated, after some early difficulties.
Is a reverse mortgage right for you?
Given Australia’s dependence on property for financial security and wealth creation, plus our large number of baby-boomers, accessing this locked-in capital could make sense for many people. But this market niche needs further scrutiny and anyone thinking about a reverse mortgage should research the options thoroughly, and then get professional financial advice that takes into account their personal circumstances.
As the range of products available grows, more flexibility is becoming available and this is an important development. These days borrowers are generally able to access funds as a lump sum, a regular flow of income, a cash reserve or a combination of all the above. Interest rate options tend to include fixed, capped and variable.
Although it’s your business what you do with your finances, some retirees consider it worthwhile to advise any family members considering themselves potential beneficiaries of any future estate distribution. This can lead to other solutions being considered in the overall mix and avoid future complications.
What are your thoughts on a reverse mortgage?