A reverse mortgage allows you to borrow money using the equity in your home as security. The loan can be taken as a lump sum, a regular income stream, a line of credit or a combination of these options.
No income is required to qualify. Interest is charged like any other loan, except you don't have to make repayments while you live in your home - the interest compounds over time and is added to your loan balance. You remain the owner of your house and can stay in it for as long as you want. You must repay the loan in full (including interest and fees) if you sell your home or die or, in most cases, if you move into aged care.
The Risks
- Interest rates are generally higher than average home loans
- The debt can rise quickly as the interest compounds over the term of the loan - this is the effect of compound interest and is something you need to be aware of before making any decisions
- The loan may affect your pension eligibility
- You may not have enough money left for aged care or other future needs
- You could end up owing more than your property is worth unless your loan has a No Negative Equity Guarantee (NNEG). Members of the Senior Australians Equity Release Association of Lenders (SEQUAL) must offer reverse mortgages that have a NNEG
- You could lose your NNEG if you don't repair and maintain your property to a standard set by the lender
- If you are the sole owner and someone lives with you, that person may not be able to stay when you die
- If you fix your interest rate then the costs to break your agreement can be very high
How much can you borrow?You may borrow from 15% to 40% of the value of your home depending on your age. The older you are, the more you can borrow. The minimum amount you can borrow depends on the provider - it may be as low as $10,000. The maximum amount depends on the value of the property. If you borrow to the max now, you may not have access to any more money later.
How much will it cost?The cost of the loan depends on the interest rate and fees. The main issue is that as the interest compounds, the debt will grow rapidly. Some reverse mortgage products also allow you to protect a portion of the value of the property. For example, you might want to ensure that you have $200,000 left in case you need a bond for an aged care hostel. Use our reverse mortgage calculator to explore your options.
