Reverse Equity Mortgages

Reverse equity mortgages are an increasingly popular option used by retirees to improve their lifestyles by accessing the equity tied up in their homes.

A reverse equity mortgage is effectively a loan against the equity in your home, usually paid out as a periodic supplement to your income. In certain situations, they can be a good option for people at the right time in their lives if the majority of their equity is tied up in their home. But the long-term financial commitments can be complex and onerous.

At what age could I consider taking out a reverse equity mortgage?

Your age is a key consideration, and the lenders set limits on what age you need to be before you can apply. But you still need to take care because, for as long as you receive the payments, the loan grows, and so does the interest you owe. Interest on the loan will compound as further interest is charged on the growing balance of interest owing. This can result in the entire future proceeds of the sale of your house being used to pay back the loan capital and interest, despite you only receiving a fraction of that sum during the period of the loan.

So, the younger you are when you take out a reverse equity mortgage, the less equity will remain when you die or move out. It could potentially erase any financial legacy you were hoping to leave your heirs.

What other factors do I need to consider?

Besides your age, there are other factors you must take into account when considering a reverse equity mortgage. These include:

• How will it affect any current benefits you are receiving or your future entitlement to the Residential Care Subsidy?
• Is the home owned by a family trust? If so, all the trustees must agree to the arrangement.
• What are the details in the contract you have to sign? You need to be sure that the contract guarantees you can remain in your home for as long as you wish (‘lifetime occupancy guarantee’), and that you or your estate will not need to pay back more than the value of the equity remaining in your home (‘no negative equity’).
• What are your other options, such as selling your house and downsizing?

We have experience in advising people on all the complexities of reverse equity mortgages. We can take you through the maths, explain the details in the contracts, describe the benefits and the drawbacks, and help you decide if it is the right option for you.