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Reverse mortgages are designed for retired people who own their own home but either need funds for investment or are struggling to have enough funds to meet their retirement needs. No proof of income is required, rather it is secured by the equity in your own home. A reverse mortgage may provide the funds you need to maintain your quality of life, dignity, and independence without the burden of repayments and still being able to remain in your own home indefinitely.

How does a Reverse Mortgage work?

A Reverse Mortgage allows you to draw down a proportion of the equity in your home with no need for repayments at any time. The loan is then repaid, along with all interest and charges, through the sale of your property when you either move into permanent retirement care or pass away. The amount of your loan is limited to the sale proceeds of the property.

The concept from the lenders point of view is simple. By limiting the amount you can borrow as a proportion of the value of your home, then the growth in the value of the property over time should more than equal the interest that accumulates. Ensuring that whether it is 10 or 30 years that passes there should be enough proceeds from the sale of the property at the end for the loan to be repaid in full.

Who is eligible for a Reverse Mortgage?

As mentioned above to be eligible for a reverse mortgage you generally need to meet the following:

• Both you and your partner are retired and over the age of 60 to 65 (varies from lender to lender)
• You are living in your own home and own it outright. Some lenders will allow you to use an investment property but generally only if you also own your own home outright.

Features of a Reverse Mortgage?

Depending on the particular provider of the Reverse Mortgage the following is a summary of the loan features and amounts available.

• The interest rate may be fixed or variable.
  
  
• The amount may be limited to either a percentage of the value of your property or a dollar amount – whichever is lesser. Eg $250 000 or 20%.
  
  
• The limit on the dollar value or percentage generally rises along with the age of the borrowers. This is because the older you are, the shorter the time on average before the loan is paid back, and the lower the risk that the value of the loan will be greater than the value of your property.
  
  
• You may have the choice between a lump sum and receiving a regular payment, or any combination of the two. There is no limitation on how you use the funds.
  
  
• You are not required to make repayments at any time. All interest and expenses are capitalised (added to) the loan balance. Though voluntary repayments are allowed at any time.
  
  
• Every 2 or 3 years your property is re-valued. This lets you stay in touch with how much equity you have in your home. If the value of your equity has gone up then you may be able to access additional funds.
  
  

When does the loan have to be repaid?

Obviously the loan needs to be repaid at some time. In general it is when one of the following occurs:

• You sell the relevant property
• You both move into permanent aged care facilities.
• You have both passed away

The amount you will have to repay is limited to the value of your home. You have the right to continue to live in your home indefinitely, even should the value of the loan become greater than the value of the property.

Examples of use:

The following gives you an idea of how a reverse mortgage might be used.

• John and Sarah are both retired and in their mid sixties. They own their own home worth $900 000 but are struggling to meet their lifestyle and medical needs on their modest combination of allocated pension and government pension. By using a reverse mortgage approved for 20% of their home ($180 000) they choose to be paid an amount of $800 per month to help with their quality of life.
  
  
• Mary is in her late 70’s and widowed. She would like $65 000 to renovate her kitchen and other urgent maintenance around their house. Instead of eating into her valuable pension Mary could use her home as security and borrow the funds with no repayments. Mary would also like an extra $250 per week to enjoy life and for growing medical cost so she also borrows an extra $100 000 for that. Mary can now do her renovations and enjoy life with no repayments.
  
  
• Andy wanted to help his son get established in his new business so he agreed to go guarantor for $100 000 worth of debts. Due to unexpectedly bad health the business failed and Andy needs to pay the $100 000. By using his own home as security Andy is able to borrow the $100 000 and remain in his own home without having to make repayments.
  
  
• John is retired and in addition to his own home has an investment property worth $700 000. With the help of a financial planner John would like to borrow $250 000 to invest into shares and managed funds. A reverse mortgage gives him the benefit of no repayments now, but should he choose he can use the income and growth on his investments to make repayments at any time.