What is a home equity conversion mortgage?

A reverse mortgage is a type of home equity conversion mortgage where you borrow money using the property's equity. It’s similar to other mortgages in that your property is held as collateral, but there are very distinct differences. 

One of the major differences is that there is an age restriction on who can take out a reverse mortgage. You can’t take out a reverse mortgage unless you’re over 60 and this also impacts how much equity you can access; the older you are, the more equity you can get released. Another major difference is that interest rates on these loans are typically higher than those on traditional house loans.

Depending on the lender, the amount which can be borrowed against the property differs. In most cases, the loan amount is influenced by the amount of home equity and the youngest applicant's age. 

You’re not required to make regular monthly repayments while you continue to live in the property. But you can make payments if you want to. You should be aware the interest on the mortgage is compounded and added to your loan, which means your loan balance will increase rather than shrink over time unless you’re making repayments.  

Based on your lender's policies and your age, you can borrow the amount as a:

• steady income stream
• line of credit
• lump sum, or
• a combination of these

However, the compounding of interest and product fees can rapidly increase the loan value and reduce equity.

In most cases, the loan must be repaid following a trigger event, such as death, moving out or selling the home. You must repay the outstanding loan (including the compounded interest) at that time. 

A Home Reversion Scheme isn’t a loan but is a way for you to access the equity in your home. With a Home Reversion Scheme, you sell a portion of the equity in your home up to 65 per cent of the current value and receive a lump sum payment and a fixed percentage of your home’s future value.

The lump sum you’re paid is frequently lowered to match your age and life expectancy. These characteristics impact the time and amount that the scheme provider will receive on the property's future value. 

It's worth noting that you keep the right to reside in the house for as long as you choose. 

When you or your estate eventually sells the residence, the Home Reversion scheme provider is entitled to a share equal to what they purchased as part of the scheme.

For example, if your home is presently valued at $500,000, and you sell a 20% ($100,000) portion of the future value. The provider may only be willing to sell you that share for $37,000 to $78,000, depending on your age. You will then pay the provider a part of the revenue when you sell your home. So, if you sell your house for $800,000 in 20 years, the provider will receive 20% of that amount, or $160,000.

In other words, the higher the value of your home, the more you'll have to pay the provider when you sell it.

When you take out a home equity conversion mortgage against your property, it's critical to understand the current and future implications. Your decision may have ramifications for your partner, family, and anybody else you share your home with. So take your time to think it through, seek professional advice, and get a proper understanding of what is required by this loan type.