Reverse mortgages

If you are retired and own your own home, chances are you've heard about reverse mortgages. They're often marketed as the perfect way to fund your next holiday or buy a new car. This is the 'buy now, pay later' marketing mantra at it's finest.

When you put all the marketing glitz to the side, a reverse mortgage might be a good way for you to borrow some money. On the other hand, if you aren't careful, you could end up with a debt you don't need. Your family may even end up with it!

If you are thinking about taking out a reverse mortgage, the bottom line is to get a loan that meets your needs and don't pay too much for the privilege. If you're having trouble sticking to your budget, a reverse mortgage may not be the best answer - you may use up the money you've borrowed faster than you expected and leave yourself with less and less to fall back on.

The more you know about reverse mortgages, the easier it will be to make a decision that's right for you. Here are some tips to help you decide what to do.

What is a reverse mortgage?

A reverse mortgage lets you borrow money using the equity in your home as security. How much you get will usually depend on your age and the value of your property. You could borrow as little as $10,000. The most you could borrow depends on the lender and the value of your property. You can receive the loan as a lump sum, regular small payments, or a combination of both.

The attraction of a reverse mortgage is that the loan, interest and any other fees or charges are repaid only when your house is sold. In the event of your death the repayment is made by your estate. During the term of the loan, you get to live in your house and you'll be responsible for the maintenance and upkeep.

A loan with no fees or interest?

Some advertisements make it look as if a reverse mortgage is a kind of "free" loan with no fees or interest. There is no such thing as a free loan! In fact, the interest rates are usually higher for reverse mortgages than they are for typical mortgages. The lender may not ask you to pay the fees or interest now. The catch is they'll take the money out of your estate after you die.

Tip The people selling reverse mortgages usually get paid a commission of the loan amount, so it's not surprising that some may offer a bigger loan than you need. The bottom line is that more you borrow, the more you or your estate will have to pay back. Don't fall for the sales tactics - only borrow as much as you need. If you're not quite sure how much that is, doing a budget is a great place to start. See Budgeting or use our free Budget planner.

 

Shop around for the best deal...urghh, do I have to?

Getting your head around all this mortgage stuff again can seem like a real effort. It's almost tempting to fall back on that old cliche 'well you can't take it with you when you die'. That may be true, and taking the first loan you're offered may be easy. But it can also whittle away your estate much faster than it should. By shopping around, you can make a more informed decision about a loan that suits your needs and offers good value for money. Shopping around is worth the effort.

Hints to save you money and grief...

• Be sure that the loan you choose offers a 'no negative equity guarantee' clause. This protects you and your beneficiaries if your loan does become greater than the realised value of your property. It's really important to check the fine print! If you're still unsure, seek expert advice.
• Check if you're able to pay the fees upfront. You'll save money if you do. If you don't, the fees are added to your loan so you'll pay more in interest.
• Be on the lookout for hidden fees. Ongoing withdrawals, early repayment or costs for on-going valuations and maintenance can all add up over time.
• Find out whether the loan is flexible enough to change with your circumstances. For instance, as people get older they may need to move into aged care. Choosing the right product means that you can avoid penalties.
• A reverse mortgage changes your mix of income and assets so your Government entitlements could be affected. To find out, contact Centrelink's Financial Information Service on 13 23 00.

Don't lose sleep over it

Choosing a reverse mortgage is a big decision - one that you need to be comfortable with. It's in your interests to be as informed as possible and ask questions if you're not sure about anything.

Before you sign on the dotted line you should make sure you fully understand all the terms and conditions. It pays to get independent advice from a professional who has the right legal and financial know-how. Getting advice from an expert will cost you money but it pays for itself if you avoid a costly mistake. See Getting information and advice.

More information

The Australian Securities and Investments Commission (ASIC) is a good place to go for information about financial products and services. See Reverse mortgages on ASIC's website for more tips and a Reverse mortgage calculator.