Features of Reverse Mortgages:

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• Amount of loan
• ASIC Checklist
• Costs
• Equity/Property Protection
• Interest rate and accrual
• Legal & financial advice
• No negative equity guarantee
• Other terms & conditions
• Portability
• Repayments
• Senior Australians Equity Release Association of Lenders ('SEQUAL')

 

Advantages of Reverse Mortgages

• You can access money which allows you to maintain or even improve your lifestyle.
• You can take the cash as a lump sum, a regular stream of income, a line of credit, or a combination of all three.
• You don’t need a current income to qualify for the loan.
• You can use the money to fund anything you want. For example, renovations and maintenance, health care, a new car, a holiday, or just day-to-day living.
• Most importantly, you can continue to live in your home and you remain the owner.
• The loan may have a 'no negative equity' guarantee (see comments below).

 

Amount of Reverse Mortgage Loans

The amount of money that you can borrow with a reverse mortgage will vary with each Lender - another good reason to use Lawfund as your mortgage broker to advise you on what is the best option.

The maximum loan amount will usually be based on the age of the youngest borrower and the current market value of your property, together with the minimum and maximum loan amounts that each Lender allows. The maximum amount you can borrow will usually be expressed as a Loan to Value percentage ratio (LVR) being the maximum available loan amount as a proportion of your property’s appraised value. The LVR usually increases with age, and generally goes from 15% to 40% of the home value.

If you elect to take out a reverse mortgage loan with a variable interest rate, you may be able to increase this loan amount as your age increases into a higher age band. If you have taken out a fixed rate reverse mortgage loan, an increase will be done as a separate loan.

 

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ASIC Reverse Mortgage Checklist

The checklist below has been transposed from the website of the Australian Securities & Investment Commission ('ASIC').

What you should ask	What you should keep in mind
What are the age and eligibility criteria for the loan?	With most loans, you should be able to borrow more, the older you are. For couples, the amount you can borrow depends on the youngest borrower's age. Some lenders may be choosy about the properties they take.
What are the costs?	Products can have a range of costs including establishment and ongoing fees and costs for home valuations. If these fees are added to your loan, interest is charged on them, which compounds (or builds up over time).
What is the interest rate?	Interests rates are generally higher than for traditional home loans and differ between products.
Has the property been independently valued?	The valuation of your home will determine how much money you get so make sure it's an independent valuation.
Is the interest rate fixed or variable?	A fixed rate usually costs a little more and a higher fee or ‘break fee’ may apply if you pay off the loan early. But if you are worried that interest rates will increase, you may wish to lock in a rate you consider more favorable over the long term.
What about rates, insurance and maintenance?	Most products require you to pay rates, maintain and insure your home. Maintenance can be costly over time. And as you get older, you may find it difficult to maintain the property in the same way you had done previously.
Are you limited in how you can deal with your home?	You are often required to live in your home and maintain it to a standard set by the lender. You may not be able to sell, lease or vacate your home without the lender's ok. You may not be able to renovate if the renovations reduce the value of the property. You may also have to check if you want someone else to come and live with you in your home.
What are the terms and conditions?	If you breach the terms and conditions in the contract you may lose key rights under the contract (such as the no negative equity guarantee) and the lender may have the right to evict you. Get a lawyer to check the fine print.
What if you want to move home?	Check if the loan is portable.
How are the funds paid?	Funds can be paid as an upfront lump sum, regular monthly payments, a line of credit or a combination of all of these options. Check which options are available.
What are the pros and cons of taking the loan in different forms?	You may be able to slow down the growth of your debt by choosing regular payments instead of a lump sum, because you pay interest only on the amount you've actually withdrawn. Check with your financial adviser which option is best for you.
What will be the impact on your government pension?	Payments can impact on your pension entitlements. Talk to Centrelink Financial Information Service or the Department of Veterans' Affairs for more information.
What if a resident in the home is not a borrower on the contract?	Only a few products protect the rights of resident non-borrowers. In other cases, they may have no rights when you die or leave the property.
Is the provider financially sound / prudentially regulated?	If not, there may be an increased risk that the provider may not be able to meet any long term promise to make payments.
Can you cancel?	Check if there is a cooling off period.
What rights do you have if something goes wrong?	If the product provider and issuer are members of an external dispute resolution scheme you will have better access to possible resolution of disputes at low cost.

 

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Costs of Reverse Mortgages

As with all home loans, there are generally setup fees, monthly loan charges and interest. Whilst the setup fees are paid at settlement, the other fees and interest are generally added to the loan. The costs vary from lender to lender, so it is important to look at a few options to ensure that you’re getting a good deal – which is where we can help you.

 

 

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Equity (Property) Protection

Some Lenders offer the ability to protect a portion of the future realisable value of the property, in effect ensuring that a fixed percentage of this future property value will be available to you or your estate, irrespective of the loan balance at that time. Again this option may attract fees, and will be subject to terms and conditions.

 

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Interest Rate & Accrual for Reverse Mortgages

As with traditional mortgages, Lenders will offer their loan with a variable rate of interest, a fixed rate of interest, or a combination of both. Again, the rates and options available will vary with each Lender, and they are generally higher than standard home loans.

It is important to note that if you elect not to make repayments, the compounding of interest will increase the size of the loan over time. To see the impact of this, Click Here to access the ASIC website's "Reverse Mortgage Calculator". It is worthwhile having a look at it to assist in your understanding of how your equity in the property is impacted by the borrowings, interest rates, property value, repayments, etc.

As mentioned above, unlike a traditional mortgage, reverse mortgage loans generally require no repayments until all borrowers permanently vacate the property, however, if you have a variable rate reverse mortgage, you should be able to make lump sum repayments without any cost, although if it is a fixed rate reverse mortgage and you wish to make a lump sum repayment there may be a prepayment cost.

 

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No Negative Equity Guarantee

A key feature and a requirement by SEQUAL of its members, is that the total loan balance repayable by the borrowers cannot exceed the net realisable value of the property at the time the loan is repaid. This is commonly referred to as a “No Negative Equity Guarantee”. This means that provided the terms and conditions of the loan have been met, the Lender cannot seek additional repayment from the borrowers personally, or from their estate, if the value of the property is insufficient to fully repay the loan.

In addition, this guarantee ensures that all borrowers have the right to live in the property for as long as they choose, even in the event that the total loan balance exceeded the property value.

These are contractual obligations given by the Lender to you, the borrower, and will be subject to the terms and conditions detailed in the loan documentation. These will vary with each Lender, but SEQUAL requires its members to clearly state these terms and conditions in the loan documentation. You should ask your solicitor to go through these terms and conditions with you should you proceed with an Equity Release loan.

 

 

 

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Other terms and Conditions

All Lenders will make the loan available to you subject to a set of terms and conditions. This is an important document that you should read thoroughly, and seek advice on from your solicitor.

These may include, but not be limited to, requirements that you as the borrower will:

• adequately maintain the property
• maintain an adequate level of buildings insurance on the property
• notify the Lender if there has been change to the structure of the property
• notify the Lender if any additional permanent residents have moved into the property.

These are all designed to protect the Lender as first mortgagee and to protect the future realisable value of the property. Check with the Lender what their specific terms and conditions are.

 

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Portability of Reverse Mortgages

Some Lenders offer a ‘portability’ option, which means that should you wish to move home, you can transfer the loan to the new property. There may be some conditions and fees attached to this option and, depending on the value of the new property, you may be required to repay a portion of the loan.

 

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Repayments

Unlike a traditional mortgage, reverse mortgage loans generally require no repayments until all borrowers permanently vacate the property (hence the term “lifetime mortgage”), that is: when you leave and move into care accommodation; when you sell the home; or upon the death of the last surviving property owner, at which point the lender will seek repayment of the funds owing from the estate.

Because there are no repayments due whilst the borrowers are living in the property, interest and fees are added to the loan balance during this period. This is often referred to as the “capitalisation” or “compounding” of interest and fees to the loan balance. Interest will usually not be charged until funds have actually been advanced by the Lender to the borrower.

Whilst there may be no commitment to make loan repayments, some reverse mortgages allow the borrower to make voluntary repayments. There would generally be no prepayment fee if the reverse mortgage is at a variable interest rate or line of credit, however, a prepayment fee may apply if the reverse mortgage has been put in place with a fixed interest rate.

The borrowers, or their estate, will typically have the option of repaying the loan out in full and retaining the property, or selling the property and repaying the Lender from the proceeds of the sale.

 

 

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