Reverse mortgages allow you to borrow cash against the value of your home. You usually don’t have to make regular repayments until you leave and move into care, sell your home or die. When the loan ends you, or your estate, must repay what’s owing, usually out of the proceeds of the sale of your home.
You are generally eligible for a reverse mortgage if you are 60 years or older and own your own home. You’ll usually be able to borrow between 15% and 40% of the value of your home, depending on how old you are – the older you are the more you can borrow.
Each year the fees and interest you would ordinarily pay are added to the loan balance. Over time, you’re charged interest on the interest (or compound interest) and that builds up the total amount you owe.
The image below shows how your equity in a reverse mortgage decreases over time.(Courtesy of FIDO).
4 Things you should ask yourself before applying:
Do I own my own home?
Am I over 60 years of age?
Do I need a power of attorney?
Do I have family I need to consult?
Ron & Jill own their own home in Drummoyne, NSW worth $1,200,000. They have lived in the same home for 20 years. Both Ron & Jill are in their early 70’s and rely on the pension as their main source of income. They also have a small portfolio of shares which help them live comfortably.
Their son and daughter-in-law want to purchase a property to live in and set up family life. However being short of a deposit, Ron & Jill decide to use the equity in their property to assist. With only a nominal income, it would be difficult for Ron & Jill to take out a standard mortgage.
After discussing all the possible options, Ron & Jill decided a Reverse mortgage would suit them best.
They took out a loan of $120,000 in total which was well below what they qualified for. They gifted $80,000 to their son towards his property purchase as a lump sum and kept the rest in a redraw facility until they needed it for their own personal use.
They never have to make a repayment and they are able to stay living in their own home.