Reverse mortgage allows 60+ Australian citizens to access their home equity without monthly repayments

What Is a Reverse Mortgage? How It Works, Pros & Cons, and More

A reverse mortgage is a type of home loan for seniors aged 60 or older. It allows them to borrow money using their home equity as security without having to make monthly repayments.


It’s a great way to borrow cash without selling your home or carrying the burden of monthly repayments.


Let’s understand how reverse mortgages work, the pros and cons, and more so you can make an informed decision.


If you’re planning to get a reverse mortgage in Australia, this is the absolute guide you’ll need. We’re covering it in great depth, so by the end of this guide, you’ll know what decision best suits your needs.


What Is a Reverse Mortgage?

Reverse mortgages in Australia are designed specifically for senior homeowners aged 60+. If you fit this persona, you can use your home equity as security and borrow money from lenders.


Unlike traditional mortgages, you’re not required to make monthly or regular repayments, although you do have the option to do so. Instead, the borrowed amount and its accrued interest are only repaid when: 

  • You sell your home.

  • You move out of your home.

  • Or when you pass away.


That means as long as you live in your home, no sort of repayments are required from your end. However, you can make voluntary repayments during this time. The interest on your reverse mortgage will build up as normal, which will all become due once you no longer live in your home.


How Much Can You Borrow on a Reverse Mortgage?

Although this could vary from lender to lender, the average starting amount you can usually borrow is 15-20% of the value of your home. Keep in mind that this is the minimum that’s usually lent to 60-year-old Australians.


The LVR of your reverse mortgage is known to increase as your age increases. A general rule of thumb is to add 1% to the LVR for each year after 60


That means if you’re seeking a reverse mortgage at the age of 65, the average amount you could most likely borrow would be 20-25% of the value of your home.


In contrast, $10,000 is usually the actual minimum amount you can borrow. This, again, depends mostly on your lender.


Key Eligibility Criteria

Depending on your lender, there may be additional eligibility requirements. However, here are some conditions that lenders across Australia use as standard eligibility for reverse mortgages:

  • Age requirement (typically 60+).

  • Must be an Australian citizen.

  • Minimum property value requirements (typically $600,000+).

  • Own your home outright or have a low mortgage balance.

  • Primary residence requirement.

  • The home must meet specific standards set by the lender.


Do you fit these conditions? We’ll help you identify the best, low-rate reverse mortgage offers available on the market.


As Australia’s #1 mortgage broker, we have access to hundreds of lenders and offers. That means we could prepare a highly personalised solution for you to help you assess the best possible offers that suit your needs.


Just get in touch with us, and we’ll take care of the rest! 


How Does a Reverse Mortgage Work in Australia?

Reverse mortgages have compound interest that adds up to the total balance of your loan


Knowing the entire process of a reverse mortgage helps you get a clearer picture of this home loan type. It starts with your loan application and ends when you no longer live in your home.


An important part of this is the interest. Let’s take a closer look…


1. Loan Application & Payout

Once you apply for a reverse mortgage, your lender will determine your eligibility. Once you’re eligible and the loan is sanctioned, you’ll be prompted to choose your payout option:

  • Lump sum.

  • Monthly payments.

  • Line of credit.

  • Or a combination of these.


2. Repayment

Unlike traditional mortgages, reverse mortgages do not require monthly repayments by the borrower. So when are you liable to pay back the borrowed amount? When you no longer live in the home you used as security.


That scenario arises when:

  • You sell the home.

  • You move out from it.

  • Or you pass away.


In the first two cases, when you sell your home or move out, you are liable to settle the reverse mortgage. However, in case you pass away, your heir must repay the loan (typically through the sale of the property).


And although no monthly or regular repayments are required, you can still choose to make voluntary repayments earlier. 


3. Interest

Like any home loan, your reverse mortgage will also accrue interest on the loan balance over time. However, since no regular repayments are made here, the loan balance (including the interest) grows larger the longer you keep the loan active.


It’s also worth noting the fact that reverse mortgages have compound interest. That means each month, interest is calculated based on the current balance of the loan. The interest from one month is added to the balance, and the next month’s interest is calculated based on the new, larger balance.


Reverse Mortgage vs. Traditional Mortgage 

There are three critical differences between a reverse mortgage and a traditional mortgage:

  • Payment Structure: A reverse mortgage does not require monthly or regular repayments, whereas a traditional one requires a regular minimum repayment. 

  • Age Restrictions: A reverse mortgage is only available to senior Australian citizens of age 60+, while a traditional mortgage is typically available to Australian citizens who are over 18.

  • Loan Repayment Timing: A reverse mortgage stays active as long as you live in the house you used as security, while a traditional mortgage is only active for a specific period of time that was mutually agreed upon by you and your lender when you took the loan.


Negative Equity Protection: No Negative Equity Guarantee (NNEG)

When taking a reverse mortgage in Australia, you are protected by the government’s No Negative Equity Guarantee (NNEG). In fact, all reverse mortgages taken out since 18 September 2012 are protected by this act.


It means that you are protected by law not to owe your lender more than what your home is worth. So, even if your home decreases in value to the point that it is now worth less than your reverse mortgage, you will never owe the lender more than what your home is worth.


And these are the three conditions you need to meet to qualify for NNEG:

  • Council rates are paid on time.

  • The property must be insured.

  • And all necessary repairs must be made.


Pros and Cons of Reverse Mortgages

A reverse mortgage is perfect for retirees who plan to stay in their home long-term


The advantages of reverse mortgages are:

  • Access to cash flow: Allows retirees to supplement their income without selling their home.

  • No monthly mortgage payments: You are not required to make regular payments as long as you live in the home.

  • Flexible payout options: Lump sum, monthly payments, or line of credit options are available according to your needs.

  • Protection from owing more than home value: You or your heir won’t owe the lender more than what your home is worth, according to the law’s NNEG.


The disadvantages of reverse mortgages are:

  • Loan balance grows over time: Interest is added to the loan balance, reducing the equity in the home.

  • Heirs may inherit less: The loan must be repaid, often by selling the home, which reduces inheritance.


Who Should Consider a Reverse Mortgage?

So, should you consider taking out a reverse mortgage? If you fit into this category of ideal candidates, a reverse mortgage may be worth looking into:

  • Retirees with significant home equity but limited income or savings.

  • Homeowners who plan to stay in their home long-term.


Likewise, you should avoid the reverse mortgage if you fit into this category of non-ideal candidates:

  • Homeowners who want to pass on their property to heirs.

  • Individuals considering relocating or selling the home in the near future.


Common Misconceptions About Reverse Mortgages

  • “The bank owns your home.”

    • Reality: You are still the owner of your home, and you will retain your ownership as long as you meet loan conditions.

  • “Heirs are left with nothing.”

    • Reality: Heirs can sell the home to repay the loan or keep it if they have other means of paying off the loan.

  • “You can be forced out of your home.”

    • Reality: As long as you meet the terms of the loan (maintaining the property, paying relevant fees, etc.), you can stay in the home.


Conclusion

That sums up this definitive guide on reverse mortgages. They’re a type of home loan for senior Australian citizens of age 60 or older, which allows them to borrow money by using their home as security.


No minimum monthly repayments are required here, and you are only liable to settle the loan when you no longer live in the house you used as security.


It’s perfect for retirees who are rich in assets but poor on cash or for homeowners who intend to stay in their house long-term.


If you’re looking for a reverse mortgage, we’ll help you discover multiple low-rate offers available on the market that suit your needs. 


A personalised solution is vital since reverse mortgages have compound interest, and they can quickly build up to a pretty hefty amount by the time of settlement.


So, get in touch with us today to benefit from the best reverse mortgage offers available!

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