Reverse mortgages – be careful and get expert advice
It could be tempting in one’s older years as income withers to sign up for a reverse mortgage – a loan taken out by a homeowner on the security of their home. It can be taken as a lump sum, a series of regular payments or as a line of credit. The difference to a regular mortgage is that the borrower is not required to make regular periodic loan repayments. Instead the estate is responsible for repaying the loan when the borrower dies or the home is sold.
Also, unlike most other mortgages, a reverse mortgage can be made without any assessment of a borrower’s income or capacity to repay the loan, so long as they own their home debt free.
But business lawyer Tony Mitchell of Stacks Law Firm counsels people to be extremely cautious about getting involved with reverse mortgages.
“The compounding nature of the interest payments that accrue has the effect of reducing the clients’ equity in their home quite substantially over time,” he said.
“For people whose major asset is their family home, taking out a reverse mortgage may severely limit their ability to make provision for family members in their Will. Also, the additional income through a reverse mortgage transaction may reduce their aged pension entitlement.”
Mr Mitchell said it is vital to get advice from both a legal advisor and a financial advisor before entering into a reverse mortgage. You might need to sell your home to move into aged care, and the debt plus interest will have to be repaid from that sale. Remember – not making any repayments means the interest compounds and the debt will grow rapidly. Changes to the law on 18 September 2012 means you can’t end up owing the lender more than your home is worth for loans taken since that date.
Before thinking about a reverse mortgage ask someone independent with expertise whether other options might be better for you. You need to consider what happens to your spouse or family if you should die with the debt still accruing? What if you need money from the sale to meet medical costs or enter an aged care home?
Reverse mortgages can be useful to relieve financial pressure or improve your lifestyle. But you need to think it through carefully before committing yourself. Check the long term effect: the Australian Securities and Investment Commission has a reverse mortgage calculator that shows a $50,000 reverse mortgage at age 60 will grow to $232,000 by the time you are 75, and $1 million by age 90.
For more information, please see our September 2021 article The reverse mortgage – one of life’s gambles?