One of the topics that seems to be cropping up in conversation more regularly among senior Australians recently is that of the Reverse Mortgage, and while our team at Ian Reid Vendor Advocates are not in the business of providing advice on home loans, it is a topic that does crop up when advising senior home owners on their property dealings.
With this in mind, we wanted remind readers that whilst a reverse mortgage can be a helpful form of financing for retirees who are “asset rich but cash poor”, the recent Royal Commission into the financial industry has reminded many Australians of some of the shortcomings of this form of home loan.
What is a Reverse Mortgage?
A reverse mortgage is a type of mortgage loan that is specifically designed for pensioners and retirees. Sometimes referred to as a senior’s loan, a reverse mortgage enables home owners aged over 60 to convert the equity in their property into cash. The loan is secured by a mortgage over the borrower’s house and whilst interest is charged just as with any other form of loan, you don’t have to make repayments while you live in your home. Instead, the interest compounds over time and is added to your loan balance. Repayment of the loan only occurs when you sell your home, you move to an aged care home or you pass away, but you are usually allowed to make voluntary repayments if you wish.
Avoiding negative equity
Since September 2012, laws have been in place to protect anyone with a reverse mortgage from owing the lender more than the property is worth…a situation known as negative equity. However, this is still a concern if you took out a reverse mortgage prior to that date.
What are the risks of a reverse mortgage?
Generally speaking, the main issues with taking out a reverse mortgage today are:
- Interest rates and fees tend to be higher than a standard home loan;
- Total debt levels can rise quickly when interest compounds over the term of the loan;
- Taking out this form of loan may affect your eligibility for a pension;
- You may not have enough equity left if you decide to move to aged care;
- Occupancy for others can be an issue if you are the sole owner of the property;
- If you fix your interest rate, costs can be very high if you decide to break the loan terms.
Clearly, there are several reasons to tread carefully where a reverse mortgage is concerned.
Reverse mortgage market under review
As we all know, a number of financial products have come under review as the Royal Commission continues to examine recent lending practise. Indeed, the Australian Securities and Investments Commission (ASIC) has suggested that lending standards on reverse mortgages have not always been fair for elderly borrowers.
ASIC has said that borrowers do not have sufficient understanding of the risks and future costs of their loans, along with the impact on their ability to fund their needs in the future. The Deputy Chairman of ASIC, Peter Kell, has been quoted as saying that while reverse mortgage products can help many people entering retirement achieve a better quality of life, there is still a need for a thorough risk analysis.
In our experience at Ian Reid Vendor Advocates, it is always wise to seek independent advice on any financial decision, whether it affects your home or not. Of course, if you do have questions about selling your home, you’ll find lots of tips in our FREE book, Fatal Real Estate Traps Exposed, or you can call the Customer Service team any time on 9430 0000.