Post by Tomorrow Finance
Reverse mortgages, whilst not for everyone, can be a viable option for those at retirement age who are in need of an income source: allowing you to leverage your existing assets in order to acquire a sizable loan.
According to the moneysmart.gov.au website “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.”
Why Would I Take Out a Reverse Mortgage?
There are a variety of reasons why you may choose to take out this type of loan: if you are a homeowner searching for a way to fund a much-needed vacation, if you have necessary home repairs, if you require an expensive purchase, or simply to help fund your retirement.
Due to recent legislation in Australia designed to protect borrowers, the loan amount will not exceed the home’s value over the life of the loan.
A reverse mortgage is calculated by looking at the following variables:
- Original loan amount
- Length of the loan
- Interest rate
- Rate of appreciation
What are the Risks in a Reverse Mortgage Loan?
Whilst there are some clear advantages to taking out a reverse mortgage, they are of course not without their downsides. When considering a reverse mortgage, some of the negative aspects to be aware of include:
- The rate at which your debt can rise due to compounding interest.
- Higher interest rates as compared to regular loans.
- Your pension eligibility may be affected.
- You may not have enough money for future costs such as aged care or medical need.
- Large origination costs (however, these costs can be incorporated into the initial loan balance).
- Your house will not be free and clear for your heirs to inherit, however, they will be given the option to pay the loan and keep the house.
- If you fix your interest rate, the cost to then break your agreement can be very high.
Who is Eligible for a Reverse Mortgage Loan?
Anyone who owns a home and is at least 62 is eligible for a Reverse Mortgage Loan. You must also own your home outright or have a mortgage that is low enough to be paid off at the time of the loan.
A Reverse Mortgage Loan is perfect for those who are asset rich but income poor. Having a perfect credit score is not required and it is often not even checked because your loan is not paid back out of your income, but rather with the money earned by the selling of your home in later years.
The elderly often choose to take out a Reverse Mortgage Loan so that they can live the way they want to live during their Golden Years.
Wrapping it All Up
For those that have done their due diligence (researching and speaking to an independent advisor) reverse mortgages may very well be a viable option to acquire extra income at retirement age and make good use of the strong equity in many Australian homes.
If you are considering a reverse mortgage, Tomorrow Finance offers an online comparison service to help you find the cheapest reverse loan for your unique circumstances.
Just be sure to always read the fine print and seek out professional advice to ensure that you are making a sound financial choice.