If you’re like many older homeowners in Australia who are asset-rich but cash-poor, you may be wondering how you can source some extra funds to enjoy your retirement. Will you downsize your home and move to a smaller residence or retirement community? Or if you’re not ready to sell, maybe you’re considering a reverse mortgage?
The right choice will depend on your personal circumstances, so it’s crucial to seek expert financial advice before you make a decision. To help get you get started with some research, in this article, we’ll provide an overview of the pros and cons of using a reverse mortgage to provide funds for your retirement.
What is a reverse mortgage?
A reverse mortgage is a type of loan that allows you to use the equity in your home as security. You can choose to take the funds from the loan as a lump sum, a regular income stream, a line of credit, or a combination of any of these. You are charged interest just like a regular loan, but instead of making regular repayments, your interest compounds and is added to your loan balance. This means you are not required to make payments while you live in your house, instead, the loan is payed off when your house is sold.
While there are benefits to this type of lending, it’s vitally important that you fully understand the risks associated before going ahead.
To help you weigh it up, here are some of the pros and cons.
Access equity without selling your home
If you’re keen to remain in your own home, a reverse mortgage gives you access to money without selling. While it’s not recommended as the sole way to fund your retirement due to the high interest rates, it can be helpful for things like travel, home renovations or even to help your children pay for a home deposit.
Negative equity protection
A common misconception with a reverse mortgage is that you can end up owing more than your home is worth. On 18 September, 2012, negative equity protection was put in place for all new reverse mortgages to stop this from happening. So when your home is sold, you cannot be held liable for any debt in excess of the proceeds of the sale (except in certain circumstances such as misrepresentation or fraud).
Can be used to pay for aged care deposit
If you need to move to an aged care facility, the amount you pay is based on your income and assets. If you are not eligible for government assistance and need to pay for the full cost of your stay, a Refundable Accommodation Deposit (RAD) will be required within six months of moving in. It’s possible to pay for this using a reverse mortgage, as long as the mortgage contract allows your home to be rented while you are in permanent aged care.
Higher than average interest rates
This type of loan often attracts higher interest rates than other home loan products, and compounding interest means your debt can grow fast. For example, if you took out a $50,000 reverse mortgage when you are 60 with a 10% interest rate calculated and charged monthly, your debt could grow to $232,000 over 15 years – as seen in this graph on ASIC Money Smart.
May impact your pension entitlements
In some cases, a reverse mortgage can affect your eligibility to receive the pension. This depends on your personal circumstances, so be sure to talk to the Department of Human Services Financial Information Service to find out specifically how it will impact you before you go ahead.
Can affect other residents living in your home
If you are the sole title holder on the house and someone else is living with you, they may need to move out if you pass away and the loan becomes payable. Some contracts do protect the rights of residents who are not the homeowner but be sure to specify this with your lender before you commit.
Final Word on Reverse Mortgages in Retirement
Deciding whether a reverse mortgage is right for you will depend on many factors, and there are some important questions you need to ask. While you may wish to stay in your home for now, will it be suitable for you as you age? Are there other residents of your home that you need to consider? And are you comfortable with the interest compounding and your equity shrinking?
As with any big decision in retirement, it’s vital that you seek expert advice from someone who can assess your personal circumstances against the available options. This can give you peace of mind and may save you from making a costly mistake.
Over to You
Do you have an experience with a reverse mortgage you’d like to share? Please post in the comments section below.
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