For many Australian seniors, maintaining a healthy cash flow can be a major worry when most of your money is tied up in assets, such as property. Superannuation and aged pensions are not always enough for our retirees to live comfortably and with confidence in their financial position, leaving many to turn to reverse mortgaging their home. This is a viable option for many, as 80 percent of Australians own their own home. But it does not come without its risks.
In this article, we explore all you need to know about reverse mortgages and why this option is likely to gain popularity with our aging population within the coming decades.
What is a reverse mortgage?
A reverse mortgage allows you to borrow money from a lender using the equity in your home as security.
Taking out a reverse mortgage will provide you access to cash while allowing you to remain in your home. You will not have to make any repayments while living in your home and can instead repay the loan once you or your deceased estate sell your home. The loan does incur interest however, which is capitalised to the loan balance. You retain the option to pay the interest as well as principal reductions, to avoid the capitalisation of interest.
Who is eligible for a reverse mortgage?
For most lenders, borrowers looking to qualify for a reverse mortgage must be at least 60-65 years of age. This age requirement extends to the youngest titleholder listed on the property title. The home must also be owned outright with no outstanding loans. Alternatively, the existing loan can be consolidated into the new reverse mortgage.
How much can I borrow with a reverse mortgage?
Generally, a senior of age 60 will be eligible to borrow around 15-20% of their home’s value. As you age however, the amount you can borrow will increase at a rate of approximately 1% for every year over the age of 60. While the ways which you can access the money as well as the flexibility of these options will vary between lenders, funds are usually accessible in three ways: a lump sum; regular instalments; or a line of credit.
A lump sum is best for any large spending requirement and will incur more interest over time, while regular instalments are best for supplementing your cash flow and covering everyday expenses. A line of credit allows you to keep a reserve of cash in a separate account with your lender to provide security for any unexpected expenses.
What risks are involved with a reverse mortgage?
Before applying for a reverse mortgage, it’s important to consider the long-term risks that could impact you and your loved ones’ future. As any interest on the loan is capitalised and often at a higher rate than a standard home loan, there is a risk of incurring debt more rapidly. Repaying the loan or even breaking the loan agreement can be very costly especially in the long-term. Also, there is a risk that once you die any other persons living in the house may not be able to keep the home if your deceased estate cannot cover the cost of the loan.
What should I consider before applying for a reverse mortgage?
First, you should assess any future expenses you may need access to funds for including aged care and medical needs. This loan type may also impact your eligibility for other financial support types such as aged pensions. You may like to receive legal advice on how this type of loan will impact your capacity to afford your needs in the future.
Why are more seniors turning to a reverse mortgage?
With 83 percent of Australian seniors wishing to spend their retirement whilst continuing to live in their own home, it’s easy to see why a reverse mortgage is a popular option. While our seniors are the wealthiest across the globe with an average of $495,000 in assets per capita, unfortunately this wealth is tied up and does not indicate cash flow. Compared to 23 OECD countries, Australia ranks second-last in retirees’ accessibility to cash and sadly 35 percent of our retirees are living below the poverty line. A reverse mortgage and equity release is an integral part of solving this crisis, and our government is supporting this with the Equity Access Scheme via Centrelink.
For those not yet of retirement age, it is never too early to consider your future. Ageing population modelling by the Australian Bureau of Statistics indicates that by 2030, Australia will have 7.5 million seniors, 2 million more than today. By 2049, this figure will rise exponentially and surpass approximately 17 million seniors.
To learn more or to discuss your eligibility for a reverse mortgage with Perth’s business and home finance specialists, contact the team a Southshore Finance today.