Westwood Conveyancing

What is a Reverse Mortgage ?

A reverse mortgage is essentially a loan that allows a home owner to borrow money using the equity in their home as security to assist them in funding home related expenses and/or can be used for personal use. 

You do not need to be earning an income to qualify for a reverse mortgage, making them attractive for retirees.

Interest is charged on the loan and there are no repayments required to be made. Given this, the loan interest is compounded and capitalised to the loan. The loan balance can be withdrawn as a lump sum or drawn down to provide ongoing income or a combination of both. 

The gearing level for a reverse mortgage is generally low and it is generally restricted to the age of the borrower.

Important Considerations 

• If there is a decrease in the value of the home of the borrower, the amount of equity in the home at risk is generally higher.
• There are initial and ongoing fees.
• The loan interest rate may be higher than a standard home mortgage.
• Loan interest is compounded and capitalised, and the loan balance will increase as a result.
• The loan will affect the inheritance that is distributed to the estate of the borrower.
• The funds remaining after the eventual sale of the home of the borrower may not be sufficient to accommodate future requirements such as aged care.
• Without a no negative equity guarantee, the end result could be a loan that is higher than the value of the home.
• There needs to be a thorough understanding of the conditions such as rights of repayment, and what happens in the event of death of the borrower or spouse.
• The homeowner should have a thorough understanding of all the potential risks and consider whether a reverse mortgage is appropriate for them.  

Source  :  Australian Investors Association

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