A reverse mortgage is currently the most common equity release product in Australia for retirees. With a reverse mortgage, you use the equity in your home as security to borrow money. This has become an increasingly popular trend since the global financial crisis, as retirees seek to supplement their incomes due to a drop in returns from share investments. With reverse mortgages you can take the loan as a lump sum, in a regular income stream, as a line of credit, or as a combination of these options. The amount you can borrow is also linked to your age (that is, the older you are, the more you can borrow).
There are a variety of reasons why people choose to take out a reverse mortgage – which is generally only available if you are aged 60 or over. Some of the reasons why a reverse mortgage may be right for you include:
• need extra money for a specific reason
• see yourself as ‘cash poor’ but ‘asset rich’ because you own your home
• want to avoid selling your home.
You don’t need to make repayments on the money you borrow while you live in your home. But you must repay the loan in full if you sell your home or die and, in most cases, if you move into aged care. The money you owe increases over time. Fees and interest are added to the loan balance as you go, and the interest compounds. This means you pay interest on the interest, plus interest on any fees or charges added to the loan balance.
What are No Negative Equity Guarantees?
Because of compound interest and fees (and not making any repayments), the amount you owe on a reverse mortgage can grow very quickly. What you owe can end up being more than the value of your home. If this happens, you have ‘negative equity’ in your home (that is, you owe more than your home is worth). For this reason it is very important that you make sure your reverse mortgage includes a No Negative Equity Guarantee (NNEG). This will ensure that in the event of your death, your estate will not be out of pocket if the value of your home falls. Most reverse mortgages protect you against negative equity by putting a limit on how much you can owe with a NNEG.
Is equity release right for you?
Using the equity in your home is a big step. It involves what is probably your most valuable asset—your home. An equity release product is only one option available to you so make sure you do your homework before you go ahead. To find out whether the benefits of an equity release product outweigh the risks for you, work out exactly what you need the money for. Some of the questions you should be asking are:
• Is what you’ll gain worth what you’re giving up?
• Can you put off using your home equity? The earlier you release it, the more you will pay.
• Is there a better way to meet your financial needs?
• Could you lose your pension or benefits?
Here at The Quinn Group our experienced team of Accountants, Lawyers and Financial Planners can assist you in deciding whether a reverse mortgage is right for you. If you have any questions regarding this, or if you would like to find out more about the No Negative Equity Guarantees submit an online enquiry or call us on 1300 QUINNS (784 667) or no +61 2 9223 9166 to book an appointment.