Reverse Mortgages – Information and Lenders

Understanding Reverse Mortgages
Reverse mortgages are complex loans which can significantly impact your finances in retirement. Before you take out a reverse mortgage, it’s important to seriously consider a few things first – make sure you completely understand the ins and outs of these loans. It is highly recommend you seek third party, professional advice before taking out a reverse mortgage.

How Reverse Mortgages Work
Reverse mortgages work by allowing you to access and use the equity in your home as a security to borrow the money that you need. The loan amount can be taken as a regular income stream, a lump sum amount, or as a line of credit. It can also be a combination of all three options.

While there aren’t any income qualifications to be accepted to receive the money, credit providers are required to lend you money in a responsible manner.

The interest on a reverse mortgage is charged like any other loan. The only thing is you don’t have to make the repayments while living in your home. The interest over time compounds and is then added to the loan balance. You still remain the owner of your home and can stay in it as long as you want to. Although if you move into aged care, die, or sell your home, you must repay the loan in full, including the fees and interest.

Who Should Consider Reverse Mortgages?
Reverse mortgages are generally appropriate for retirees who have built up equity within their home and who want to increase their overall standard of living.

 
Reverse mortgages may also benefit

• Those who need access to money urgently for special purposes including travel, medical expenses, vehicle purchase or home improvements.
• Those who may be downsizing to improve their cash flow in retirement but who want to stay in their home.

Potential Risks of With Reverse Mortgages

• The interest rates tend to be higher than general home loans.
• As the interest compounds over the loan term, the debt can rise quite quickly. This is something you need to be aware of before you make your final decision.
• The eligibility of your pension may be compromised by the loan.
• You may not have sufficient funds for future needs or aged care.
• If you live with someone but you’re the sole property owner, the other person will have to leave when you die depending on certain circumstance.
• If you want to fix your interest rate, this will break the agreement and the costs involved will be high.

Impacts Of Reverse Mortgages On The Centrelink Aged Pension
If an aged pension takes out a reverse mortgage, it’s not generally classed as Centrelink income. However, the amount taken out may be subject to a means test by Centrelink when the amount is classed as a financial investment. The eligibility of the age pension shouldn’t be affected when the reverse mortgage is drawn for small amounts to meet living expenses. If the amount is drawn out in one big lump sum, it could affect the eligibility for the aged pension. Centrelink allows up to $40,000 to be exempt from any assessment for 90 days. If there is a period of time after this where the money isn’t spent, it will be subject to a means test.

Important Long-term Considerations
In some cases, you may come across a company which wants to offer you a constant income stream in return for your home’s capital growth. Although the cash flow may look very attractive, the actual amount you’ll receive will most likely be lower than your homes capital appreciation. These offers are generally not covered by financial or credit service laws which means that you won’t have access to important consumer protections including free external dispute resolution. It’s important to research all your options before you commit fully.

Negative Equity Protection
The Government, on the 18^th of September 2012, introduced statutory negative equity protection on all new contracts associated with reverse mortgages. This means that you can’t owe more than your home is worth in equity or with the market value. When the contract of your reverse mortgage ends and your home is sold, the lender will receive all the sale proceeds and you won’t be held liable for any debt that’s in excess of this expect when there is evidence of misrepresentation or fraud circumstances. If your home is sold above what’s owed to the lender, you’ll receive the extra additional funds.

If you’ve already taken out a reverse mortgage before the 18^th of September 2012, make sure you check your current contract to see whether you’re protected if your balance owed is more than the property value.

How Much Can Be Borrowed?
You can borrow more the older you are, however the different lenders will have different guidelines and policies which will tell you how much they will lend. As a general overall guide if you’re aged 60 years, the maximum amount which you will most likely be able to borrow is up to 20% of your home’s value. 1% can be added for each year above 60. If you’re 70 years of age you may be able to borrow up to 30% of your home’s value.

Loan amounts are based on individuals

 
Reverse Mortgage Lenders
There are numerous lending options in Australia. Below are some of the different lending providers that offer reverse mortgages.

• Seniorsfirst
• Heritage
• Commbank
• St George
• Bankwest
• BankSA
• Heartland Senior Finance
• Homesafe

If you don’t bank with any of the above, ask your current bank if they provide reverse mortgages.

How Much Will A Reverse Mortgage Cost?
The interest rates and the fees will determine the cost of the loan. The debt will grow rapidly as the interest compounds. There are some reverse mortgages which allow you to protect some of your property’s value. As an example you may want to make sure you’ve left a certain amount of money towards a hostel for aged care.

If you decide to borrow from a lender which isn’t an Authorised Deposit-taking Institution such as a credit union, building society or bank, by law they must not charge over 48% in interest including all charges and fees.

Important Questions for Loan Mortgage Providers
It’s important to check the following before you sign any agreement. Professional advice is always recommended.

Reverse Mortgage Information Statement
Do you understand how these types of mortgages work? Before signing anything your credit assistance and credit provider must give you a reverse mortgage information statement.

This statement should include:

• Contacts for more detail.
• What you need to consider before you take out your reverse mortgage.
• How all the costs are calculated.
• Full disclosure on how these mortgages work.

Financial Forecasts of These Loans
What’s the impact of reverse mortgages over the long term? When seeking advice from your credit assistance and credit provider they must go through the calculations with you of your reverse mortgage while they have you in person. This must be done before you take out your reverse mortgage.

These projections will:

• Show the potential impact of house price movements and interest rates.
• Show the effects a reverse mortgage may have over time on your property’s equity.

It’s important to understand all these projections and how different circumstances can change the equity value your home holds. If there’s anything you’re not sure on, make sure your provider explains it thoroughly before you sign anything.

A printed copy must be given to you with the projections when they calculate it. Remember, however that projections are only an overall estimate and shouldn’t guarantee the amount of equity you’ll have when taking out the mortgage loan.

 
Security
Before accepting anything, see whether the lender can accept an investment property or holiday home as security to help keep the family home debt free. If your home is already mortgaged, find out whether there are any special arrangements in place before taking out a reverse mortgage.

Special Terms and Conditions
Always ask whether there’s any restrictions on what you can use the money for. There are some lenders which have specific restrictions in place that only allow you to use the money for a specific set of things. This is important so you don’t break your agreement in anyway.

Always review the fine print.

Cooling Off Period
As with insurance, revers mortgages come with a cooling off period, which allows you to pull out if you change your mind. Always check to see whether your loan has a cooling off period. During the cooling off period if you feel like you’ve made a mistake, it’s important to tell your provider as soon as possible before the cooling off period ends. This way you won’t get caught with something you don’t want. Cooling off periods can range from a week up to 8-12 weeks.

Life Changes
If you or your spouse dies, it’s important to find out what happens next. You also need to find out if you have to transfer the loan to a new home if you decide to move. You’ll also need to check with the lender whether you need their permission to renovate, vacate, lease or sell the home or if someone is allowed to move in with you.

If you come into a large sum of money, find out what the process of terminating the agreement are and understand possible consequences in terms of fees.

What If Things Go Wrong?
If things go wrong, it’s important to know what external dispute resolution scheme your lender belongs to. Ask them about their dispute resolution scheme so you know who to turn to when you have a problem.

Be Informed and Don’t Enter a Contract Under Duress
Before signing a reverse mortgage agreement, make sure you do your own research. Check reviews on these loans in general as well on the lenders that provide them. If you aren’t confident in your decision or are feeling pressured, wait and ask a professional for some advice.

Free financial counsellors are a great source of independent and unbiased advice that have your best interest in mind.

Get Legal Advice Independently
Before signing your reverse mortgage contract it’s best to ask for advice from your legal adviser to explain the fine print. This allows you to understand everything including the consequences of breaching any of the terms and conditions. Breaching the terms and conditions can be costly especially when you didn’t mean to do it in the first place.

Other Financial Help
If you are considering a reverse mortgage because of minor cash flow or financial issues, review other financial assistance programs first. You may qualify for grants and benefits that can help with cash flow. In addition, there are numerous concessions that can help with different bills and debt forgiveness.

Its important to explore all financial assistance programs before tapping into your main asset.

Conclusion
Reverse mortgages can be a useful way of relieving financial pressure or to help improve your overall lifestyle. However, it’s important to be aware of the loans terms and conditions, and the available choices you have access to. Always use a mortgage broker that’s licensed and seek advice about your finances before making the final commitment to take out a reverse mortgage.