Benefits of a Reverse Mortgage

Although reverse mortgages are not suitable for everyone’s financial situation, they are a powerful tool and carry benefits not offered by traditional loans.

The most obvious benefit, of course, is the availability of ready cash without a return to the workforce, the repayment obligations of a conventional loan, or accruing credit card debt at a substantial rate of interest. This source of funds can make a remarkable difference between a subsistence retirement and one that is enjoyable and free of the usual money worries.

As the property itself serves as a repayment guarantee for the loan, one doesn’t require a current income to qualify, merely the title to one’s home. There is no need to return to the workforce to make repayments on a regular basis.

Also, the home remains the property of the owners for as long as they wish. There is no need to move house, as would be the case if one were obliged to sell the house to access its equity. If one does choose to sell the home after obtaining a reverse mortgage, some instruments are “transportable” from one property to another, although if the new property has a substantially lower value than the original one, some portion of the debt may require repayment at that time.

Should retirees not own their homes outright, a reverse mortgage can be used to pay off the remaining balance of the original mortgages. This frees them from making regular payments, so that their available superannuation and savings go further toward their general living expenses.

A reverse mortgage can also be applied to an investment property, such as a vacation or rental house, rather than one’s principal residence. This could be a substantial factor should the family home be intended as a debt-free inheritance for one’s children.

In previous eras, the equity in the family home was considered a major portion of the children’s inheritance. However, in modern times fewer retirees are wedded to this belief. A reverse mortgage gives these home owners the opportunity to “spend the kids’ inheritance now,” and properly managed, a percentage of the home may be guaranteed to the inheritors after the amount of the loan, plus accrued interest and fees, has been settled.

The reverse mortgage also can be arranged with a guarantee of no negative equity, meaning one will never owe more than the house is worth, with a shortfall to overcome when it is eventually sold.

Managed properly, a reverse mortgage does not affect pension benefits. This is best done when the equity is used to finance an ongoing income stream rather than being taken as a lump sum payment. Funds can be used for any worthwhile purpose, such as travel, home improvements, or the purchase of a new car.

However, certain uses can affect pension entitlements, including large monetary gifts and certain purchases, such as vehicles, that would be assessed as assets by Centrelink. This is a complex issue, and should be discussed with an independent financial advisor who is cognizant of one’s complete financial situation, and with a representative of the Centrelink Financial Information Service or the Department of Veterans’ Affairs, whichever is applicable.