Depending on how much you’ve saved over the years, retirement can be an exercise in budgeting. While superannuation payments are a welcome reward for years of tax-paying, they are unlikely to cover the cost of day-to-day living in its entirety. And they certainly won’t do much if a large expense, such as surgery, home maintenance, or even a family wedding comes up.
If you’re no longer working, securing a loan could be difficult. So what options do you have?
One of the most popular lending facilities available to seniors is a reverse mortgage. A reverse mortgage can be a lifesaver when in need of a large amount of cash. But, it can also have some serious drawbacks and should be carefully considered.
What is a reverse mortgage and how does it work?
A reverse mortgage is a loan that uses your house as security. You can take out a loan against the equity in your home, which is then paid back, with interest, once the house is sold. This differs from most loans, which require regular repayments.
So, with a reverse mortgage, you essentially remortgage a portion of your home. But it differs in that you don’t make any repayments until the house is sold. The loan can be paid out to you in the form of a lump sum or in several instalments.
Who can get a reverse mortgage loan and what are the conditions?
To be eligible for a reverse mortgage there are a couple of basic restrictions:
- You must be at least 60 years of age
- Your home must be mortgage-free (a reverse mortgage may be possible if a very small mortgage amount remains)
- Minimum loan amounts apply
Aside from these, reverse mortgages usually come with a lifetime occupancy guarantee, meaning there is no pressure to sell the property. The loan term is for as long as you (or anyone else on the loan agreement) lives in the property.
However, this does mean that once the last person named on the loan leaves the house the debt must be settled. So, if you wanted to leave the property to your children, they would have to either sell it (and give the required share to the lender) or pay the outstanding debt.
Additionally, a reverse mortgage loan usually has a no negative equity guarantee, meaning no matter how large the debt, you will not have to pay more than what your home sells for, should it decline in value. So, worst-case scenario, when the house is sold you’ll earn no money from the sale.
What are the pros?
The biggest benefit of a reverse mortgage is that you do not have to make any repayments until the house is sold. If your finances are already tight, regular loan repayments can take more money out of your budget. This can make it even more difficult to meet your living expenses, possibly sinking you into further debt or financial difficulty.
While having to give up some of the money from your house sale is not ideal, it may be a more manageable way to finance a large loan.
Most reverse mortgages allow you to pay off the loan early. This means that if your financial situation changes, you can opt to pay back the outstanding loan without the need to sell your home. You can do this in full or in part. So if you have the excess funds you can pay off some of the loan, reducing the amount you will lose come sale time, or the full amount, ending the reverse mortgage loan agreement.
Property value increase can offset interest
Reverse mortgage loans come with interest, meaning you have to pay back more than what you initially borrowed. However, depending on how much the value of your property increases, this could effectively offset this interest.
For example, if you borrowed $50,000 of your houses $500,000 value, you would have $450,000 left in equity. 10 years later your loan may now be $80,000 due to interest added, but your house may now be worth $600,000 leaving you with $520,000 in equity.
What are the cons?
This is a big one. And it’s the number one thing you need to consider before getting a reverse mortgage. Reverse mortgages have compounding interest. This means any interest added onto your loan is subsequently charged interest.
For example, if you borrow $50,000 and are charged 5% interest p.a. by the end of the first year your loan amount will be $52,500. The next year, you’ll pay 5% not on the initial $50,000 loan, but on the $52,500, and so on, over the years. Quickly, your total debt can mount up.
Floating interest rates
Reverse mortgages tend to be on floating interest rates, so you have no guarantee of what interest you’ll be charged. If you’re looking at holding onto your home for another 10 or 20 years after you secure your loan, there is no telling what mortgage rates may look like that far down the track.
We may have record low-interest rates at the moment, but they are already on the way back up. Additionally, interest rates for reverse mortgages tend to be somewhat unfavourable, and are typically higher than standard floating mortgage rates.
Upfront costs and ongoing expenses
There are some common upfront costs that come with a reverse mortgage. These usually encompass legal fees and an evaluation fee.
After the initial costs some potential ongoing costs may be:
- Houses are usually required to be fully insured
- Rate payments must be met on time
- Further inspections and evaluations may be required
- Ongoing work may need to be done in order to meet requirements around the adequate maintenance of your property
You may have taken out a reverse mortgage with the intent of staying in your home for years to come. But if you can’t meet ongoing costs, you could be forced to sell up.
Your dependents could end up out of home
Once the last person on the loan agreement leaves the property, the debt is due. So if you are to pass away, anyone who lives in the property, but isn’t signed onto the loan, will have to leave.
Should you get a reverse mortgage?
A reverse mortgage shouldn’t be your first option. Compounding interest can quickly spiral and eat away at the equity in your home. And this can cause problems down the road. When the time comes to sell, you could be left with too little to afford an appropriate new home. Or it could be well below what is required to pay for a care facility for your remaining years.
If your home holds sentimental value, and you intended to leave it to your heirs, they will have to fork up the outstanding loan, or that family home will be sold off to a stranger.
Ideally, if you can find alternatives to a reverse mortgage, you should. But, as this isn’t always an option, a reverse mortgage can be a great tool to have should you need it.
What other options do I have?
An easy and cheaper alternative to a reverse mortgage is to sell your home and downsize. This way you get to keep the full equity in your home, instead of losing it on interest payments.
The idea of downsizing can be an emotional wrench. But it can also offer plenty of pluses, including lower-maintenance living, reduced upkeep costs, and an opportunity to boost your savings.
But aside from selling up, while more traditional lending, such as home equity loans, may be more difficult to access in your later life, they can still be an option. It may pay to try to access these avenues before deciding on a reverse mortgage loan.
Compare personal loans with Canstar
While accessing loans in later life can be a challenge, it’s not out of the question. After all, lenders only look at your ability to meet repayments, so age itself isn’t a factor. Before looking into a reverse mortgage, it pays to shop around and see if a personal loan will be an option for you.
Which is where we, here at Canstar, can help. We make it easy to find the best personal loans available, by comparing the interest rates, monthly repayments, and application fees of different providers, so you can find the best option for you.
To learn more, or to start comparing, just click the button below:
About the author of this page
This report was written by Canstar Content Producer, Andrew Broadley. Andrew is an experienced writer with a wide range of industry experience. Starting out, he cut his teeth working as a writer for print and online magazines, and he has worked in both journalism and editorial roles. His content has covered lifestyle and culture, marketing and, more recently, finance for Canstar.