A reverse mortgage is a loan catered towards pensioners and retirees (ages 60 and above) that lets you borrow money using the equity in your home as security. The loan can be taken as a lump sum, regular income stream, a line of credit or a combination of these, and this cash can be used for any purpose – meeting day-to-day living expenses, home renovations, travel, new car etc.
The amount you are allowed to borrow depends on how much your home is worth, current interest rates and your age. The older you are, the more you are eligible to borrow, and different lenders have slightly different policies. Generally, if you are 60, the maximum you can borrow is around 15-20%, which increases up until 45% as you get older.
Interest & Repayments
Interest is charged like any regular loan, except you are not required to make repayments as long as you are residing in your home. Crucially, you retain full ownership of your home and are able to stay living in this home for as long as you want. The debt, including all interest and fees, is repaid to the lender when you sell the property, move into aged care, or pass away.
Although a reverse mortgage can be a powerful tool for funding for retirees who want to be more comfortable in retirement, there are a few things you need to look out for before taking on a reverse mortgage:
- Interest rates and ongoing fees are generally (around 1%) higher than the standard home loan
- The debt will increase as interest rates rise on your loan
- The loan may affect your pension eligibility
- Costs of breaking an agreement with a fixed interest rate can be extremely high
- The debt will increase as interest compounds over the term of the loan (effect of compound interest)
– The below figures shows the impact of compound interest on debt as the interest rate increases by 2%Assumptions: house value – $632,598, interest rates – charged monthly, loan amount – $118,627, borrower age – 65