Australia has enjoyed tremendous property price growth through the years; however, it is an unfortunate fact that many retirees have no savings program to match it, and are left “asset rich but cash poor” on an inadequate pension. Although they may own a lovely home outright, worth many thousands of dollars, they may not be able to afford a holiday or necessary ongoing medical care, or even day-to-day living expenses. A reverse mortgage is one method of alleviating this situation.

A reverse mortgage allows homeowners to withdraw equity from their home rather than undertake the task of selling it and moving house. Essentially, it’s a first mortgage, much as the homeowner obtained to originally purchase the property.

However, with a reverse mortgage, no payments must be made until the owners permanently vacate the house. An amount of money equal to a percentage of the equity is available to serve one’s needs, but payment is not made until the house is sold, the owners vacate the property permanently, or their estate is probated.

Because financial requirements and situations vary among individuals, there are options for homeowners considering a reverse mortgage. For example, funds can be accessed in a lump sum, a steady stream of income over time, an available line of credit, or some combination thereof. The interest rate can be fixed or floating, with the best products offering a capped rate. Voluntary repayments can be made in advance of the discharge date, although fees and conditions may apply.

The amount that can be borrowed depends upon several factors, including the value of the property and the age of the youngest borrower. The percentage will vary between 15% and 40% of the value of the home. This percentage rises with the age of the borrower, with 60 years being the lowest allowed; there is no upper age limit.

Some reverse mortgages allow the borrower to protect a percentage of the home’s equity against repayment of the debt when it becomes due, leaving something for an accommodation bond should the borrower go into an aged-care facility, or as a guaranteed inheritance.

However, a reverse mortgage can affect one’s pension entitlements. Reputable lenders strongly suggest a person considering a reverse mortgage discuss the ramifications of the decision with an independent solicitor, an independent financial advisor, and the Centrelink Financial Information Service or the Department of Veterans’ Affairs, prior to undertaking such a major financial commitment.

Because the lender does hold mortgage to the property, the company can to an extent control what is done with the house, including rental, renovations, or allowing another person to move in on a permanent basis. A very few lenders allow a borrower to vacate the home without triggering the loan’s repayment date.

Reverse mortgage brokers, even those associated with reputable lenders and major banks, often earn a commission based upon the aggregate of the loans they sell. For this reason, they may attempt to convince a borrower to assume a larger loan than originally intended. One should remember, in the heat of the moment, to protect one’s own interests; a “cooling off” period is also desirable.