Reverse Mortgage – How Does It Work?

Also called a senior’s loan or senior’s finance, reverse mortgage is very popular nowadays. This is a form of home equity release that let those 60+ convert the equity in their home into cash. Like a standard home loan, this is a way for homeowners to borrow money using their own property as security for the loan. 

This loan option might sound too good to be true, and it’s a great option for those who qualify and have a strong long-term plan. However, it’s important not to confuse this for free money. The homeowner still needs to continue paying their loan and any added interest, and it’s important to understand how a reverse mortgage fits into your financial goals. 

Since a reverse mortgage typically happens around the age of retirement, it’s important to understand what exactly it means for your future. In this guide, we’ll explain everything you need to know about a reverse mortgage and how it works. 

How Does a Reverse Mortgage Work?

Since this is such a unique type of loan, there’s understandably a lot of confusion around how it works. Equity is the value of your home minus any money you still owe. For example, if your home is valued at $400,000 and you still owe $200,000, your home equity is $200,000. 

With a reverse mortgage or a home equity release, you can access some of your equity while you still continue to live in this home. The amount of money you qualify for depends on your age, the current value of your home, and the type of equity release you choose. 

How much of your home equity can you borrow? You can’t access all of it. In the example above, you won’t be able to access the full $200,000 of your home equity. For a reverse mortgage, you can borrow typically around 15-20% of the value of your home. An additional 1% is added for every year over 60. 

The specific amount you can borrow depends on your lender. Most people end up borrowing around $10,000. This money is borrowed as a regular income stream, line of credit, lump sum, or a combination of these options. 

Do You Still Have to Repay Your Mortgage?

What happens to your home payment if you do a reverse mortgage? While you’ll still owe interest on the loan which compounds over time, you don’t need to make any payments while you still live there. However, you’re still required to live in your home and keep it in good condition. 

How is the loan paid if you’re not making payments? While you can continue to make voluntary repayments earlier, the loan is repaired in full when you sell or move from your home. Your repayment will include any added interest and fees. If you pass away before you sell or move from your home, the cost typically is taken from your estate. 

Before you take out a reverse mortgage, talk to your lender. They can provide you with projections for the future, showing you how much you’ll owe over time. 

Why Do a Reverse Mortgage?

There are a number of reasons people choose to do a reverse mortgage. The most common reasons are:

  • Home renovation
  • Medical expenses
  • Help with living costs
  • Secure aged care accommodation
  • Income supplement in retirement

Unlike other types of lending options, a reverse mortgage ensures you still remain the owner of your home. You can continue to live there until you’ve decided your next steps, making it a good choice for many people in retirement. 

However, you’ll also need to keep in mind that your debt will grow over time. These added interest payments and fees can be high, and it could affect your eligibility for the Age Pension or whether you can afford aged care. You’ll need to consider your long-term retirement plan and whether this is a smart choice within the larger picture. 

If you plan to sell your home, renovate, or move to an assisted living facility in a handful of years, a reverse mortgage can be a great fit. It’s always a good idea to create a budget and work with a professional before making any large financial decisions. 

Is a Reverse Mortgage Right for You?

Ultimately, reverse mortgages can be helpful for Australians with short-term or immediate financial needs. While getting access to wealth tied up in your home equity could be a great opportunity, it needs to be weighed carefully. Interest rates for reverse mortgages are usually higher, and this means there are significant long-term consequences if you’re not careful. 

Planning for retirement requires a lot of factors. You need to know your long-term living situation, and you’ll need to save appropriately. Working with a financial professional sooner rather than later is a great way to get a head start. Whether you’re considering a reverse mortgage or an alternative, make sure you know exactly what steps you’re taking next. Take the first step and speak with one of our expert consultants today. Call us on 1300 368 322 for an obligation-free and confidential chat, we’re here to help!

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