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 following table is a guide to what percentage of the property’s value can be borrowed, based on the age of the younger borrower:
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Lenders generally place no restrictions on how reverse mortgage funds can be used. Common reasons for obtaining funds are as follows:
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 :
The average reverse mortgage settlement time is about three weeks from the time of application.
Advantages include:
Disadvantages include:
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 :