If you’re over the age of 60, own your home, but don’t have much in the way of savings, you may be the prime candidate for a reverse mortgage.
A reverse mortgage can help ensure you’ve got enough funds to secure a smooth retirement.
What is a reverse mortgage?
A reverse mortgage is a loan designed for those over the age of 60 who own their property. This loan allows you to access some of the equity tied up in your property, either as a lump sum, a regular income stream, or both.
Reverse mortgages typically don’t need you to make immediate payments either; you’re expected to repay the loan when you sell or move out of the house, or pass on.
How do they work?
Even though you aren’t making repayments, interest will continue to be charged on the loan and added to the total loan amount.
In 2012 the government introduced negative equity protection for those who take out reverse mortgages. Negative equity protection guarantees that you cannot end up owing the lender an amount greater than the value of your home; if the value of your home decreases you’ll be protected from paying back more than you are able to.
How much can you borrow?
Typically lenders will allow you to borrow between 15% – 50% of the current market value of your property. While policies vary lender to lender, generally you can expect to borrow a higher percentage of your equity for each year you age past 60.
What will it cost?
The interest rates on reverse mortgages tend to sit a little higher than the standard market rate. In some cases the application may be higher than what you’d expect from a standard mortgage too.
Are there any downsides?
Just like any financial product, the potential impacts of a reverse mortgage should be carefully considered.
- A reverse mortgage usually requires you to remain living in your home. If you need to move out for any reason the loan will need to be repaid in full, or the house sold to cover the debt.
- A reverse mortgage can impact the inheritance you leave to your heirs. If they don’t have the funds available to pay off the loan after you pass, the house will need to be sold.
- The lump sum payment may affect any pension payments you are receiving
- Because of the way interest is charged it can accumulate quickly, turning the debt into a much larger figure.
If you’re unsure whether a reverse mortgage is the right choice for you we recommend talking to a broker to get a better understanding of your financial circumstances and the options that are available to you.
