A Reverse Mortgage or Home Equity Conversion Mortgage (HECM) loan enables Senior Australians over 60 years to access the equity in their home as security to borrow money. This can be taken as a regular income stream, a lump sum, a line of credit or a combination of these options. Seniors who contemplate a reverse mortgage are often asset rich but cash poor. But is a reverse mortgage a good alternative to downsizing or some other solution?
To begin with I am not about to venture into the territory of securing a reverse mortgage. My interest comes from reading about the availability of reverse mortgages and the experiences of others. After all the years that my “One & Only” (O&O) and I have worked and saved to own our home I do not want it to be partly owned by the bank or some other lender in my retirement years.
Using the equity in your home and converting it to cash can sound attractive, but how attractive is it really and what are the pro’s and con’s of a reverse mortgage?
There are over 40,000 Australians who have gone down the track of securing a reverse mortgage. Not all of these have understood the risks of a reverse mortgage and many have failed to seek independent legal advice. The pleasure of securing cash through a reverse mortgage for renovating the house, buying a new car, going on a holiday or buying a better lifestyle can quickly disappear once the reality of an accumulated debt hits home!
Often the interest rates on a reverse mortgage are higher than the average home loan and with compound interest the debt can increase exponentially. At this rate I expect it could create an element of stress in retirement years when the aim should be to eliminate stress after a life time at work.
Take for example a reverse mortgage loan of $200,000 on a home worth $1,000,000 with upfront cost of $1,500 and paying off the interest at $1,000 a month (interest at 7%). After 5 years the mortgage debt would be $359,182 and after 30 years and 9 months the equity falls to zero.
Let’s try another calculation: a home worth $750,000 with a reverse mortgage loan of $50,000. The mortgage debt after 5 years would be $146,538. It would be more than 35 years before the equity falls to zero. Similarly, if the loan in this situation was $100,000 the equity would fall to zero at 32 years and 7 months.
There is a strong possibility in the situations I described above of negative equity if a person lives a long life. As of 2012 the Federal Government introduced statutory “negative equity protection” on all new reverse mortgage loans. However, anyone who took out a reverse mortgage prior to 18 September 2012 should check their contract to see if they are protected.
If you are considering a reverse mortgage take the time to investigate all the pro’s and con’s. Seek expert advice. Engage a licensed mortgage broker. Do NOT sign a reverse mortgage contract, as attractive as it sounds, without having the contract reviewed by an independent legal advisor. Talk to a Financial Information Service (FIS) Officer at Centrelink for information about how taking out a reverse mortgage may impact on your eligibility for an aged pension or Health Care Card. Utilise the reverse mortgage calculators available online. If you are helping a relative and they are not computer literate ensure that they are fully aware of the risks and the period of time whereby they will reach zero equity. Always take time in your decision making; your life could depend on it!
Please note: the information provided in this article is for demonstration purposes only. It is not to be taken as expert opinion. Anyone considering a reverse mortgage should seek advice from a licensed financial advisor and qualified legal advisor.