What is a re­verse mort­gage?

Wangaratta Chronicle - North East Property Guide - - FEATURE LISTING - Writ­ten by | view.com.au in Fi­nance

What is a re­verse mort­gage? It is a niche ques­tion but one that is go­ing to be­come in­creas­ingly asked as pop­u­la­tions get older.

The ma­jor­ity of peo­ple who should be ask­ing, ‘What is a re­verse mort­gage?’ are those ap­proach­ing re­tire­ment but not yet there (10-15 years away). It is a com­mon mis­con­cep­tion that re­tirees are those who need to think about the ad­van­tages of a re­verse mort­gage, but plan­ning is ev­ery­thing when it comes to your fi­nan­cial health which is why it is best to ask these ques­tions (and get the an­swers) years be­fore you need to start implementing changes.

What is a re­verse mort­gage… ex­actly?

A re­verse mort­gage is pre­dom­i­nantly tar­geted to­wards re­tirees as it al­lows you to bor­row money us­ing the ex­ist­ing eq­uity in your home as se­cu­rity. You may also be able to use the eq­uity in an in­vest­ment prop­erty or hol­i­day home (to keep your Per­ma­nent Place of Res­i­dence free from a mort­gage) but some lenders may not ac­cept this.

A re­verse mort­gage is more com­pli­cated than the typ­i­cal mort­gage a first home buyer or in­vestor usu­ally comes across. There are many ways you can shape a re­verse mort­gage to suit your fi­nan­cial needs. For in­stance, you can ei­ther earn a reg­u­lar stream of in­come through a re­verse mort­gage, re­ceive a lump sum, earn a line of credit or mix these op­tions to­gether.

You don’t usu­ally pay in­ter­est on your re­verse mort­gage (in­ter­est is higher in a re­verse mort­gage than reg­u­lar mort­gages). In­stead, it is added to the value of the loan and com­pounds. You even­tu­ally pay the loan when you sell the home (for in­stance, if you move to an aged care fa­cil­ity). Note: as Aus­tralia’ s gen­eral pop­u­la­tion ages in the fu­ture and a growing por­tion of the pop­u­la­tion en­ter re­tire­ment with mort­gages, there will be a growing de­mand for re­fi­nanc­ing op­tions such as a re­verse mort­gage. How­ever, reg­u­la­tion will likely grow as a re­sult so that the econ­omy does not be­come re­liant on un­healthy risk­ing prac­tices. This may mean it will be­come harder to en­ter into a re­verse mort­gage.

The ben­e­fits of a re­verse mort­gage

1. The great­est ben­e­fit of a re­verse mort­gage is that it al­lows you to lever­age the value of your home to max­i­mize your com­fort in the later stages of your life. There is also a sig­nif­i­cant flex­i­bil­ity in­her­ent in the many ways in which you can take out a re­verse mort­gage.

2. For those con­tracts en­tered as of 18 Septem­ber 2012, you are no longer li­able for any debt you in­cur that ex­ceeds the value of your home. If you sell your prop­erty and the price the house re­ceives does not match the debt you owe, the lender can­not pur­sue you for this out­stand­ing fee. This is a great ben­e­fit as it pro­vides some ease of mind for those con­cerned about ma­jor fluc­tu­a­tions in the mar­ket.

3. The amount you can bor­row in­creases with

your age, by ap­prox­i­mately 1% of the value of your home for each year over the age of 60 (where it be­gins at ap­prox­i­mately 15% of the value of your home).

4. You can of­ten pro­tect a por­tion of the value of your home, pro­vid­ing you with an as­sured de­posit for po­ten­tial aged­care costs (such as the de­posit for an aged-care fa­cil­ity).

5. Your lender must pro­vide you with bud­get cal­cu­la­tions that pro­vide an es­ti­mate of the costs as­so­ci­ated with fluc­tu­a­tions in the mar­ket or in the in­ter­est rate, and they must pro­vide this to you in writ­ten form. You can use this to talk with a fi­nan­cial ad­viser about the fea­si­bil­ity of a re­verse mort­gage.

The lim­i­ta­tions of a re­verse mort­gage

1. In­ter­est rates for a re­verse mort­gage are typ­i­cally higher than reg­u­lar loans. On top of this, with­out proper plan­ning, the com­pound­ing of in­ter­est on your re­verse mort­gage risks giv­ing you a shock when it comes time to pay the loan. 2. Gen­er­at­ing in­come from a re­verse mort­gage can af­fect your pen­sion.

3. A re­verse mort­gage can be quite com­pli­cated; as can the po­ten­tial even­tu­al­i­ties of tak­ing out a re­verse mort­gage. For in­stance, if you un­for­tu­nately pass away as the sole owner of the home with your part­ner re­main­ing be­hind, they may have to leave the home so that it can be sold to pay the loan. It is im­por­tant to seek thor­ough ad­vice on how a re­verse mort­gage will af­fect your par­tic­u­lar fi­nan­cial and liv­ing sit­u­a­tion.

4. Some com­pa­nies of­fer a stream of in­come in place of the cap­i­tal gains made on your prop­erty. This can be risky as your in­come (which is fixed) may be dwarfed by the cap­i­tal gains your home ac­crues (in the case of a surg­ing mar­ket). In this case, you may not be cov­ered by con­sumer laws if you wish to dis­pute such an arrangement. What’s the next step in your re­search? Get a home loan quote from over 40 lenders with View Home Loans.

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