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Reverse Mortgages

September 2019

A reverse mortgage loan is quite different from a standard bank term loan secured by a mortgage and repaid over a term of years.  It is therefore important that you receive independent legal advice about the terms of the loan and the mortgage and that those are clearly explained to you.

The major characteristic of a reverse mortgage is that no repayments are required to be made until maturity of the loan.  Effectively the interest payments that would otherwise be paid during the term loan are added to the loan principal and becomes payable at the same time as the loan principal. The effect of this is that the equity in the property will decrease by the accruing interest payments.-3

To qualify, a borrower is required to meet certain minimum criteria namely:

  • You must be at least 60 before you can apply for a reverse mortgage;
  • You can borrow a percentage of your home’s value;
  • Your home needs to be mortgage-free, although you may be able to borrow if you have a small mortgage left and use the loan to pay it off.
  • The lender may not lend on some types of property for example, farms, lifestyle blocks, holiday homes, property held in trusts, property held as tenants in common, or retirement villages. 

The maturity of the loan is expressed to be on the death of the last surviving borrower or on the borrowers vacating the property and moving into permanent care. 

Reverse mortgages usually offer a “no negative equity” guarantee that ensures that you or your estate will not have to repay more than what your house sells for.  The lender may also offer an equity protection which guarantees a percentage of your equity is protected.

The main advantages of a Reverse Mortgage are:

  • Your loan may be transferrable, for instance, you may want to move to a new home;
  • You are not making any repayments during the life of the loan.  The loan will be paid off when the house is sold;
  • You remain in your home until you are ready to move on.

Some disadvantages of a Reverse Mortgage are:

  • Interest rates are higher for reverse mortgage loans – up to 2% above regular home-loan floating rates.  Interest compounds so may eat into your remaining equity.
  • There are ongoing expenses that need to be met. For instance, your home must be fully insured.  You must pay your rates on time and you must maintain your property adequately.  You may be required and at your own cost, to have your home revalued from time to time.
  • The life occupancy guarantee only applies to those named on the loan agreement.  If you have a partner whose name is not on the loan, they wouldn’t be able to stay on in the property if you died or moved into care. 

Other options

In deciding whether to enter into a reverse-mortgage, you should consider the nature of the obligations you are incurring and should consider the other options open to you other than entering into the loan agreement. 

Those could include the following:

  • Taking out a personal loan;
  • Downsizing to a smaller house;
  • Using savings or investments;
  • Borrowing from family;
  • Taking on boarders to supplement your income;
  • Applying for any additional Government assistance.