Reverse mortgages enable you to withdraw equity from your home. With a reverse mortgage there is no obligation to make any repayments of principal or interest. Perhaps you have the problem of being asset/equity rich and cash poor and you need funds to assist with some home renovations for old age, to fund some lifestyle needs, or to assist you to fund an Accommodation Payment to access Aged Care.
Some features of reverse mortgages are:-
- The amount you are able to borrow will depend on the home’s value and age of the borrowers;
- You don’t need to make repayments of principal or interest; BUT, and this is a big but –
- The interest gets added to the loan – the wonder of compound interest then works against you. If no interest payments are made, the debt will double every 12 years;
- The interest rate will likely be higher than a normal mortgage arrangement.
Before you enter into a reverse mortgage you must:-
- Get good legal and accounting advice about the implications, short and long term;
- Consider and fully understand the compound interest nature of the loan;
- Understand what penalties may apply if you have chosen a fixed interest rate and need to pay break fees on early repayment – break fees can be exorbitant;
- Understand the establishment costs of the loan;
- Understand the impact if your variable interest rate changes;
- Consider ways of limiting the debt e.g. drawing down in tranches as needs require, delaying draw down of the loan to minimise interest or having children, (who may end up with the property), assisting with the interest payments; and
- Enquire whether there are other options available to obtain the outcome you are seeking, rather than entering into a reverse mortgage.
Used properly, reverse mortgages can be a very effective tool in the right set of circumstances – but not unless you fully understand the implications of your actions and get the right advice.
The information in this document represents general information and should not be relied on for your specific circumstances. If you require legal advice and assistance on the matters contained or associated in this document you should contact MMLaw. Please contact Christine Matsinger.