What is a reverse mortgage and are you eligible?

If you’ve crossed the age of 60 and are looking for a way to get some extra cash for retirement, you may be able use a reverse mortgage to access the equity that is tied up in your home. A reverse mortgage allows older Australians to borrow money using their home as security for a loan. If you’re eligible for a reverse mortgage, you can choose to receive the loan amount in regular payments that can help you during your retirement or as a lump sum if you need to make a large payment. 

However, a reverse mortgage does come with certain risks and can affect your eligibility for other benefits, like the Age Pension. So, if you’re planning to apply for a reverse mortgage, you should gather as much information as possible to make an informed decision. Depending on your situation, you may also need financial and legal advice. 

How does reverse mortgage work? 

A reverse mortgage allows people over 60 to borrow a certain proportion of their property’s value, which is repaid when the borrower has sold the house, moved into aged care or died. The borrower is charged interest on the amount they are loaned, which compounds. This means that the amount that needs to be repaid will continue to increase as the interest builds up, even if you don’t borrow additional funds. 

Sometimes reverse mortgages are used to pay for daily expenses, bills and debts, home improvements and car expenses. 

What are the risks of a reverse mortgage? 

While a reverse mortgage may cover your immediate expenses, you need to be aware of the long-term risks of the loan. Some of the risks involved include: 

• The interest rate and fees for a reverse mortgage are often higher than standard home loans, which means your debt can rise quickly over the term of the loan. 
• If you’re living with someone else, that person may not be able to continue to stay in the house after you die. 
• The cost to repay the loan or to break the agreement is usually very high, especially if you choose a fixed interest rate. 

How to qualify for a reverse mortgage 

The age requirement to get a reverse mortgage for most lenders is at least 60-65 years. To be eligible for a reverse mortgage, your home loan should be paid off. 

Usually, there is no specific income eligibility for reverse mortgages; however, most lenders will follow responsible lending requirements. For example, you can only borrow a proportion of your home’s value. As a rule of thumb, people aged 60 can generally borrow no more than about 15-20 per cent of the value of their property. 

Other factors to consider

If you’re looking at applying for a reverse mortgage, you should consider multiple factors before making a decision. Some of the things that you should consider while applying for a reverse mortgage include: 

Future expenses 

Before applying for a reverse mortgage, first, think about your future needs and how the loan could impact your ability to afford them. 

Eligibility for pension

This type of loan could have an impact on your pension entitlement. It’s worth consulting with the Department of Human Services’ Financial Information Service about the impact of the loan before making any decisions. 

Think about the other implications

There could be some clauses in the fine print of your agreement that carry risks that are not immediately clear to you. So, ask your legal adviser to explain the details and clauses of the reverse mortgage agreement. This will help you get a complete understanding of the terms and conditions and possible risks.

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