A reverse mortgage is a finance facility which has been specifically designed for senior Australians to help them access the substantial amount of equity tied up in their homes. Funds borrowed against the equity in their home can be used for any purpose to help seniors enjoy a better quality of life than would otherwise be available.

Reverse mortgages have rapidly become an important retirement planning solution allowing seniors a flexible way to finance important projects without being forced to sell the family residence and without the worry of having to make regular monthly repayments to the lender.

Funds can be taken in the form of a cash lump sum, monthly income, a cash reserve fund or a combination of all these methods.

The lender will register a mortgage over the property and hold the title as security in the normal manner. Income is not assessed and monthly repayments during the life of the loan are not required from seniors but may be made voluntarily. Generally, but not always, the outstanding loan balance, including accrued interest and fees, is repaid when the house is sold or passes to the estate of the last surviving borrower.

Under a conventional mortgage, you borrow funds from a lender to purchase a property, then make regular “principal and interest” repayments to the lender. Over time, the loan balance reduces and eventually you repay the loan in full and own the property outright.

With a reverse mortgage, the process operates in reverse. Seniors generally own their property outright to begin with and a lender advances you funds for your personal use. As you are not required to make any repayments, interest and fees are added to the loan balance each month, so the loan balance increases over time. The loan is paid out when the property is sold or refinanced by beneficiaries.

The amount seniors can borrow is generally based on two key factors:

• the value of the security property as determined by the lender’s valuer
• the age of the younger borrower. This is the principal factor in setting the allowable “loan to valuation ratio” or LVR. For example, if a 70 year old is married to a 65 year old, the maximum loan amount is calculated based on the younger borrower’s age.

The following table is a guide to what percentage of the property’s value can be borrowed, based on the age of the younger borrower:

Lenders generally place no restrictions on how reverse mortgage funds can be used. Common reasons for obtaining funds are as follows:

• essential repairs to the home
• paying of other mortgage balances, personal loans or credit cards
• purchase a new car or caravan
• travel
• assist family
• accommodation bond for aged care instead of selling the home
• additional monthly income to supplement Government or private pension
• health care costs
• maintain premiums on important insurance policies.

Seniors should obtain independent financial advice to ensure that their social welfare or Centrelink benefit entitlements are not affected.

Most borrowers take the following steps :

• check with Centrelink regarding any possible impact on benefit entitlements
• obtain independent financial advice if you feel this is beneficial
• discuss your plans to arrange a reverse mortgage with family/beneficiaries
• compare lenders’ products and select your preferred lender
• complete the lender’s application form
• advise your solicitor of your intentions to borrow as legal advice is compulsory
• send the application and supporting documents to the lender
• make an appointment with the valuer to inspect your property
• loan documentation is sent to your solicitor
• meet your solicitor who must explain the contract fully
• sign contract and return documents to the lender including the Certificate of Title and evidence of insurance
• funds are paid into the bank account you nominate

The average reverse mortgage settlement time is about three weeks from the time of application.

Advantages include:

• seniors can remain in their homes and not be forced to sell or go without
• the family home can be retained as an important asset
• it is easy to turn equity into cash
• it is not necessary to prove your income
• monthly loan repayments are not required
• no restrictions on how funds may be spent
• funds available in about three weeks from the time of application

Disadvantages include:

• loan balance will increase over time as monthly repayments are not made
• your home equity may be eroded over time. This will depend on the rate of future property value increases
• property values may not increase or may even fall
• beneficiaries’ inheritance will be affected
• Centrelink entitlements may be affected
• there may not be sufficient equity for aged care costs in later life
• the property title must be given to the lender as security for the loan

Yes. Reverse mortgages do not involve the sale of a portion of the property to the lender. You continue to retain full ownership of your home and you will also keep all future capital gains as the home increases in value. You are simply borrowing money and offering your property to the lender as security for the loan. Reverse mortgage lenders will register a mortgage over the title at the time funds are advanced. The lender will hold the Certificate of Title as security during the life of the loan, however the borrower will remain the owner of the home. Owners will be responsible for normal maintenance and insurance of the property.

Key criteria for a reverse mortgage with most lenders are as follows :

• borrowers must be 65 years of age or more. There is no maximum age limit and it does not matter if you are a pensioner, a self-funded retiree or working part-time.
• you should own a residential property either solely or jointly. If there is a loan balance outstanding on the property, this needs to be paid out from the reverse mortgage loan proceeds.
• the security property will usually be the principal place of residence, but some lenders will accept a holiday home or an investment property as security for the loan.
• the location of the security property must be acceptable to the lender. Metropolitan properties are usually acceptable, but postcode restrictions may apply in outer metropolitan, regional or country areas. Individual lenders should be contacted in these situations.