What is a Reverse Mortgage and is it a Good Idea for Retirees?

A reverse mortgage can be a good idea for retirees in need of supplemental funds, but is it right for you? In this article, we will cover what a reverse mortgage in Australia is, the benefits and important details you should know about them.

What is a Reverse Mortgage?
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​A reverse mortgage is one of many types of home equity release that allows homeowners access to the equity of their home by borrowing against it. In effect, it is a little like a mortgage in reverse, hence the name. Rather than you having to pay the lender a mortgage, the lender pays you as a fixed lump sum, line of credit, or a regular income stream.

Who Can Pull a Reverse Mortgage, What Does it Pay & How Much Does it Cost?

Anyone in Australia can pull out a reverse mortgage provided that they meet two basic criteria:

1. Be aged 60 or over;
2. Own a home (even if you still have an outstanding mortgage) with equity.

Whether you own your home in full (mortgage paid off) or still have an outstanding mortgage, so long as you’re 60 or over you can take advantage of a reverse mortgage to access the accumulated equity.
How much you’re eligible for depends on your age and the value of your home. Generally, you are eligible for a larger payment if you are older and if your home is valued higher. The minimum amount you can borrow is generally around $10,000.

The amount that you are eligible to borrow in total is approximately 10%-15% of your home’s value (assuming you are 60). That amount can go up as one ages.

In order to receive a reverse mortgage payment, either continually or as a lump sum, there are usually fees involved. These fees may include nominal application fees, fees for servicing the loan, and/or fees for terminating the loan. The duration of the loan can also come with fees, as does the method of receiving the loan (lump sum, line of credit, etc.).

Benefits of a Reverse Mortgage
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• Can ease retirement by providing a stream of income for daily necessities;
• Can provide a source of funds for home improvement projects;
• Can be put towards outstanding medical bills;
• Allows retirees to remain comfortably at home without being forced to move out;
• Multiple lenders offering multiple methods of payment;
• Lenders must provide you with clear and transparent projections of your mortgage, so no unpleasant surprises.

Drawbacks of Reverse Mortgages

• Your home equity will decrease;
• You may reduce any inheritance for your loved ones;
• Interest on the loan will grow over time;
• Homeowners must continue to pay property taxes, insurance, etc. or else risk voiding the terms of the loan;
• May involve unwanted fees*

*This last point is an important one for anyone considering a reverse mortgage. Just as you’d likely put thought and effort into choosing a mortgage lender back when you bought your home originally, you should also seek a wealth management firm that offers fair, transparent rates on reverse mortgages.

Is a Reverse Mortgage a Good Idea for Retirees?

A reverse mortgage can be an excellent opportunity for retirees to access the equity of their home to maintain a comfortable and dignified lifestyle into old age, allowing them to savour the hard-earned golden years. As with all investments and loans, however, it is always important to consult with a reputable wealth management firm to explore your options.

Davlin Wealth Management

Consult with us at Davlin Wealth Management.