Are you “asset rich” but “cash poor”?
This can be a common issue for those over 60. As you move into retirement and adapt to the next stage of life — money might be tighter than it used to be, budgeting has changed and making a larger purchase can be intimidating without the salary you’ve been used to over the years.
However, retirement doesn’t have to be financially tough. You should be enjoying your retirement to the fullest — after all, you’ve worked hard to get where you are now!
Whether you’re looking to renovate your home, take a holiday, buy a new car or simply support your finances for general living and medical expenses, a reverse mortgage might be a great option for you.
New to the idea of a “reverse mortgage”? You might be wondering what it is, how a reverse mortgage works and whether it’s the best option for you. In this article, we explain all of this and more.
What is a reverse mortgage?
If you’re over 60 years of age and own your own home, you may be eligible for a “reverse mortgage” or equity release loan as it’s also known as. Essentially, you can access a portion of the value of your home or property without having to sell or move out, making it a great option for those whose net worth is tied up in their home.
This kind of mortgage can provide some much-needed peace of mind — you have the flexibility to draw on your funds when you need them and use them for a range of options, including:
- Living costs
- Renovation costs
- Stamp duty and brokerage on moving or downsizing
- Medical costs
- Consolidation of debts
- Refinancing
- A new car or another large purchase
- Holidays or travel.
You can receive funds as a lump sum or draw funds on a monthly basis. Using Gateway’s online banking app and linked Visa Eco Debit Card, you can access your funds as and when you need them, so there’s no pressure to withdraw and spend!
The loan balance (including compounded interest) will be due when the borrower passes away, moves out permanently or sells the property. Until then, you aren’t required to make any ongoing repayments — however, you can choose to make payments at any time to reduce the balance of your loan and pay off the interest.
How much can I borrow under a reverse mortgage?
It depends on two key factors: your age and the value of your property.
Here are some examples:
- Tom is 60-years-old and looking to get a reverse mortgage. His existing property is worth $800,000 and we can lend a maximum of 15% of the value of the property (LVR). This means he has the potential to borrow $120,000 for renovations, a holiday and his ongoing living expenses.
- Mary is 65-years-old and looking to get a reverse mortgage. Her existing property is worth $800,000 and we can lend a maximum of 20% of the value of the property (LVR). This means she has the potential to borrow $160,000 for renovations, a holiday and her ongoing living expenses.
- Greg, on the other hand, is 75-years-old and his property is worth $750,000. The maximum LVR of a reverse mortgage increases 1% with each year of the borrower’s age, meaning Greg (being a decade older than Mary) can borrow up to 30% of the property value. He may be able to borrow $225,000 from Gateway.
When you apply for a reverse mortgage with Gateway, we’ll provide information about how much you can borrow and explain every step of the process to you.
Benefits of a Gateway reverse mortgage
Our reverse mortgage gives you the flexibility to draw down your funds when required. You can have peace of mind knowing that approved funds are available when you need them while only paying interest on the funds you use.
At Gateway, the minimum age for a reverse mortgage is 60 and we can lend up to 15% of the value of the property (LVR). This amount increases by 1% every year thereafter — meaning a 75-year-old could borrow up to 30% of the property value.
Another benefit includes the ability to access your funds via online banking, phone banking and a linked Gateway Visa Eco Debit Card.
To ensure you understand all the elements of a reverse mortgage, we recommend seeking independent financial advice about reverse mortgages. We also recommend discussing reverse mortgages with your family and any beneficiaries as a reverse mortgage will impact any potential inheritance from the sale of the property.
Things to consider before taking out a reverse mortgage
While a reverse mortgage offers flexibility, it does come at a cost and with risk. Before taking out a reverse mortgage, consider the following.
Compounding interest
Reverse mortgages accrue compounding interest, meaning your monthly interest is added to the loan amount and interest is charged on the total loan amount in the future. This can have a significant impact over time and is something that you should discuss with your financial advisor or broker.
Inheritance
While reverse mortgages come with a no negative equity guarantee (i.e. you will never owe more than your house is worth), taking a reverse mortgage can impact how much equity is in your property when it comes time to sell. You will need to consider your family’s inheritance and we recommend discussing a reverse mortgage with your family before going ahead with it.
Other occupants
If you have other people living in your home that are not part of the reverse mortgage, they might not be able to continue living there after you pass away or move out. Consider whether it would be best to enter a reverse mortgage with a spouse or partner as a joint borrower so that you will both be protected.
Pension implications
If the proceeds of the mortgage go towards an asset like a car or simply sits in your savings account, it is possible that this will have an impact on your pension. You should seek independent financial advice and investigate the impact on your pension before taking out a reverse mortgage.
Other options
There are a number of considerations when thinking about a reverse mortgage. It may be worth considering other options to access funds, like downsizing your home or investigating the government’s pension loan scheme (PLS) before taking out a reverse mortgage.
With all of this in mind, we recommend seeking independent financial advice to help you make the right decision for your individual needs. For more information about the benefits of a Gateway reverse mortgage, be sure to download our reverse mortgage brochure. We’ve provided helpful information to help you make a decision about your finances.
Why do I need an exit strategy for a reverse mortgage?
Before going into any kind of mortgage or loan, we always recommend planning an exit strategy for the future. You never know when problems and emergencies are going to arise, like needing to head into hospital or move into an aged care facility. When this happens, you may need to sell your home.
Aged care can cost thousands of dollars and if the balance of your loan has increased due to compounding interest or drawing funds, you may need to change your plans or bring them forward.
Some people choose to use a reverse mortgage as their exit strategy. However, we recommend talking to your financial planner about the best method moving forward to ensure you make the best possible choice for your future.
Contact us for more information about reverse mortgages & submitting an application
Still asking “how does a reverse mortgage work?”
No trouble at all. Contact our team on 1300 302 474 or submit general enquiries online through our website. Our team would be more than happy to explain the intricacies of reverse mortgages and help you make an informed decision about your finances.
