Is a reverse mortgage right for you?

You generally know how a mortgage works. You borrow money, the lender holds the title to your property as security, and you make repayments over a period of time to discharge the loan – usually with interest.

A reverse mortgage works a little differently. Essentially, a reverse mortgage allows you to access around 15–20 percent of the equity you have built up in your property over a period of time to spend on whatever you like. Equity is the difference between the value of your home and the amount you owe on it.

No proof of income is required; it is targeted towards senior-aged borrowers. While interest is charged on the loan, it actually compounds or capitalises over time and is added to the loan balance. So that means no home loan repayments for as long as you live in your home.

Sounds dreamy, right? Well, for some, yes – but not for all.

Like every gleaming deal, there is a catch, which is this: you must repay the loan in full (including interest and fees) when you sell your home, die, or – in many cases – move into an aged care facility.

Weighing the risks and benefits

Now if you are so lucky that your home experiences phenomenal capital growth over the course of the loan, a reverse mortgage could actually be a blessing. Companies such as Australian Property Monitors offer property reports to help you determine growth trends in your area.

It could make aged living a lot easier, enabling you to travel, pay bills and enjoy quality of life in the present with a reduced financial burden.

Mortgage Choice’s head of corporate affairs Jessica Darnbrough says, “The most common usage we see for taking out a reverse mortgage is for lifestyle, to purchase a car, renovate the home and also to supplement the age pension.”

But as you know, most property prices run in cycles, and while property growth is a relatively safe bet, the amount of that growth cannot be guaranteed against things like the compounding interest of a reverse mortgage loan.

Take this example: a loan of $50,000 at 60 years old could mean you’re effectively paying off $323,000 when you’re aged 75 – or worse still, $1.041 million at 90 years old! Think how that will affect your quality of life.

Worse still, it could impact your pension entitlements, or the other people who may be living with you. Imagine having an elderly surviving relative evicted from your home after your death because the house and loan were ultimately in your name?

Sadly, a number of people have fallen prey to a scheme that seemed better on paper than in reality. As a result, ASIC have released a public paper about the risks of reverse mortgages to help borrowers make an informed decision.

The trick is, essentially, to do your research. There are a number of products on the market offering competitive reverse mortgage deals for aged borrowers.

Bankwest’s Seniors Equity Release Home Loan, for example, is tailored toward the “asset-rich but cash-poor” aged borrower.

If you’re over 65, you can potentially borrow up to $250,000 with a minimum property valuation of $200,000. There are no regular repayments and interest as a variable rate is capitalised – rather than compounded – over the duration of the loan.

A mortgage broker can help assess your situation and determine if a reverse mortgage may be a suitable decision. Alternatively, there are many loan comparison websites that allow you to do your own research and determine what is right for you.