One of the major conclusions reached by the writers of this report is that, in order to make wise and informed financial decisions, retirees need several sources of high quality, independent advice (pg 45). Three sources of advice were specifically mentioned.

The ASIC survey found that, even amongst borrowers currently holding a reverse mortgage, these financial instruments aren’t well understood. Some borrowers reported being surprised at the fees and charges incurred; others did not understand all of the conditions under which they would be in default on the loan. To prevent such surprises, the prospective borrower should have an independent solicitor review the contract, not only to ensure that the paperwork is “kosher” but also to ensure their own comprehension of all the loan’s terms and conditions.

If the prospective borrower receives government income support, additional advice should be sought from a Centrelink Financial Information Services (FIS) officer to determine what impact, if any, the reverse mortgage funds will have on those benefits. Centrelink considers numerous factors when assessing funds drawn from a reverse mortgage, including whether the loan is applied to a primary residence or rental or vacation property, the amount drawn down, how quickly the money is spent, and what has been purchased. For example, the purchase of a new car is generally deemed an asset and may reduce one’s benefits, another unpleasant surprise that can be avoided with sound advice.

Perhaps most importantly, the prospective buyer should seek counseling with an independent financial advisor. In this interview, consideration should be given not only to the prospective borrower’s immediate and short-term financial needs, but also to what may happen twenty or more years in the future.

It’s not a happy thought, but the future may include funding an accommodation bond for an aged-care facility, or paying for increased health care or medical procedures. If the prospective borrower has not allowed for these possibilities and reserved a significant portion of the home’s equity under the terms of the reverse mortgage, there may not be sufficient funds remaining to cover these needs, possibly the most unpleasant shock of all.

An independent financial advisor can assess one’s current situation and plan for those future needs. With such assistance in drawing up a long-term budget, the prospective borrower is more likely to exercise discipline and good judgment, and less likely to “blow through” the funds available.

A reverse mortgage is a powerful financial tool and used properly it can benefit the borrower for many years. However, used improperly or with poor consideration of possible consequences, like any tool it can harm the user.

The not-for-profit members organisation for reverse mortgage providers, SEQUAL, requires prospective borrowers obtain their own legal advice, and strongly advises they also speak with Centrelink and financial advisors. Sound advice from independent counselors is the most powerful tool of all.

For this reason, many retirees feel reassured by having a source of available funds even if they never need it, and this can be provided by a reverse mortgage. Arranged properly, a reverse mortgage can be set up and then left alone to serve as a rainy-day line of credit, without incurring interest charges until funds are actually withdrawn.

As reverse mortgages draw on the equity in one’s home, they do not require repayment until the property itself is permanently vacated or sold, generally when the homeowners go into aged care facilities or the estate is settled. This ready access to funds without incurring a monthly note explains why reverse mortgages are becoming increasingly popular among Australia’s retirees.

Particularly when the adult children are already living well without the benefit of an inheritance from their parents, there’s no reason retirees should worry about money, request a loan from family members, or deny themselves medical care when the equity in their home is available for use if needed.

Properly arranged, a reverse mortgage can function as just such a line of credit. As with any financial product, different lenders offer different packages, and one must read the fine print to ensure the product agreed upon meets one’s needs. In such circumstances, the advice of a solicitor and a financial planner are helpful and are generally required by reputable lenders prior to closing the deal.

There are additional benefits to arranging a reverse mortgage as an available line of credit rather than taking the funds as a lump sum. One of these benefits is that interest is charged only on the money actually advanced, and therefore the total amount of the loan at repayment tends to be lower with a line of credit than with a lump sum disbursement.

Another benefit is that amounts withdrawn from a line of credit are generally not assessed as income by Centrelink. Amounts of less than $40,000 are not counted as assets if spent within 90 days, as would be the case if the money were withdrawn only when needed, for example to pay for a medical procedure. One should, of course, discuss this thoroughly with a Centrelink representative as well as one’s solicitor and financial planner prior to withdrawing any funds and risking one’s benefits.

To serve as a line of credit, a reverse mortgage should contain certain features. Although application and set-up fees are expected, they should not be outrageous. There also should not be exorbitant charges for repeated withdrawals, should one need to access funds multiple times; some lenders charge as much as $400 per withdrawal. Every reverse mortgage should contain a guarantee of no negative equity, to prevent the loan from overwhelming the value of the house; and some lenders even allow for protection of a certain percentage of the equity to ensure a legacy for one’s children, whether they require it or not.

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.