A reverse mortgage can give you access to cash without having to sell if your money is tied up in the value of your home.
We look at how they work and who they suit.
What is a reverse mortgage?
A reverse mortgage works in almost exactly the opposite way to a regular home loan. Rather than making regular repayments and building equity in your property, a reverse mortgage lets you take out some of the equity in your existing home and turn it into cash.
Do you need to make repayments?
Generally, you don’t need to make any repayments towards a reverse mortgage while you’re still living in your home. Instead, interest and fees accumulate on your loan and then you - or your estate - must pay these along with the loan principal to the lender when you sell you home, move into aged care or die. Although some lenders will give the opportunity to pay into your reverse mortgage before then.
The interest rate on a reverse mortgage is often much higher than on a traditional home loan. It also compounds, so that the more you borrow and the longer you borrow it for, the more interest you’ll usually have to pay.
One feature of a reverse mortgage is usually that you get lifetime occupancy in your property. That means you can’t be evicted under the terms of the reverse mortgage.
How much can you borrow under a reverse mortgage
Usually, the older you are, the more you can borrow. Most lenders will have a maximum loan-to-value ratio of between 25% and 45% but if you’re under 60, you’re only likely to be able to borrow 15% to 20% of your home’s value.
That means if you own an inner-city Sydney home worth $1.2 million, you eventually may be able to borrow anywhere between $300,000 and $540,000. But if you’re under 60, that figure is likely to be somewhere between $180,000 and $300,000.
You can often get access to this money as a lump sum, line of credit or even as regular income payments.
Who does a reverse mortgage suit?
A reverse mortgage is usually something you might consider if you want to stay in your home and you have a substantial amount of equity in it. For instance, if you’re retired and cash-poor but asset-rich, it can be an effective way to get hold of money to pay for your lifestyle.
Taking out a reverse mortgage is not without risk. It can affect your entitlement to the pension or your eligibility for other government assistance, so you should always get independent financial advice before you go down this route.
Alternatives to a reverse mortgage
Before you take out a reverse mortgage, you should always consider what other options are available to you, and for many, that would include downsizing. After all, downsizing your property can often liquidate cash, and improve the quality of your life rather than limiting it.
There are more properties available now than ever to suit people who need accessibility, as well as proximity to good transport and lifestyle options. Many new apartments, for example, offer the same benefits as a freestanding home - such as generous proportions and privacy - with the added benefit of lower maintenance, fewer costs and increased security.
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