Reverse Mortgage Information

With a reverse mortgage, the equity in one’s home can be considered a sort of retirement savings account or nest egg. It represents a significant amount of money that can be used to fund one’s retirement in comfort. However, that equity nest egg must be budgeted properly to provide for the long term requirements of the homeowner.

It is difficult if not impossible to calculate, at the time of taking out a reverse mortgage, the total amount that will be due at the end of the term. This final sum is dependent upon several unknowable factors, including future fluctuations in interest rates and home values. Even the term of the loan cannot be determined, as it depends upon the long-term health and housing requirements of the borrower.

For this reason, one should preserve that nest egg even while accessing it, and there are means of doing so.

Prior to seeking a reverse mortgage, it’s important to remember that the borrower’s desires are in direct opposition to those of the lender. The higher the amount of the loan sold, the greater the bank’s profits, and often the higher commission paid to the customer service representative, whereas it’s to the borrowers’ benefit to withdraw as small an amount as will fulfill the current financial requirements.

Therefore it’s important to budget in advance. Prospective borrowers should have a sum firmly in mind, and not allow a sales pitch to talk them into a higher one. Remember, it’s always possible to redraw from the loan and remove more equity should the original sum not suffice, but it’s rather more difficult to put the money back where it came from after it’s been spent.

A second means of protecting that equity nest egg is to withdraw the money as a steady stream of income rather than a large lump sum, if at all feasible, even if the funds are to be deposited into an interest-bearing account.

The reasons for this are three-fold: Firstly, the amount of interest earned, even from a high-interest online savings account, is not likely to equal the amount charged through the reverse mortgage. Secondly, larger drawdowns are more likely to affect one’s Centrelink benefits. Thirdly, interest is charged only on funds that are actually drawn down; as the interest so accrued is added into the principal of the loan and accrues interest in its own turn (compound interest), accumulating rather quickly, it’s obvious that the less interest earned, the more equity will be protected.

For the same reason, one should shop around for the lowest interest rate, and the lowest charges and fees, including redraw fees and house re-evaluation charges. Some banks add these charges and fees into the loan principal, others withdraw them from the amounts paid out, however, both bite into that equity nest egg, leaving less for one’s own needs.

Shopping around, of course, takes only a few minutes on the Internet. Particularly useful are loan brokerage websites, which often gather all the data on the offers of various lenders into one spot for easy perusal, making it simpler to locate the reverse mortgage that will allow a comfortable retirement through one’s home equity without eroding it entirely.

A reverse mortgage is the diametric opposite to the mortgage used to purchase a home. With a “forward” mortgage, the home buyer makes payments to the lender, reducing the debt and increasing the equity; with a reverse mortgage, however, the lender makes payments to the borrower, reducing the equity and increasing the debt.

Like any mortgage, a reverse mortgage carries an interest rate. It’s simply part of the cost of doing business with a lender, and certainly no surprise to anyone. What may surprise prospective borrowers, however, is that a reverse mortgage carries a higher level of interest than a forward mortgage, sometimes substantially so.

The reason for this difference is the risk to the lender. With a forward mortgage, as the amount of the debt is decreased, the lender’s risk is being lowered. Should the borrower’s financial situation deteriorate, the lender always has the option of foreclosing on the loan, evicting the borrower, and selling the house to recoup the outstanding amount.

With a reverse mortgage, however, there are no repayments during the life of the loan and therefore no corresponding lowering of the lender’s risk. On the contrary, with the increasing life expectancy among Australia’s senior citizens, these loans can easily remain outstanding for twenty to thirty years—and no banker, however hard-hearted, wants the negative publicity inherent in evicting a pensioner from his or her home.

For this reason, the interest rate for a reverse mortgage is higher than for a forward mortgage. However, the prospective borrower does have several options to consider regarding this interest rate.

All lenders of reverse mortgages are willing to write a loan with a variable rate of interest. Those lenders with a more flexible financial product are also willing to fund a loan with an interest rate that is either fixed or capped, both options either for a certain length of time or over the life of the loan. These lenders include ABN AMRO and Bluestone, which both earned a Five-Star Rating from CANNEX in their October 2007 rating of the reverse mortgage industry, in part for this very flexibility.

Unless the borrower arranges to pay the interest as it becomes due, these charges are added to the amount of the loan and accrue interest themselves (compounding). In this manner, the amount of the loan will roughly double in ten to twelve years, with the actual length of time taken by the process depending in large part upon the actual interest rate charged. Over time and without a no negative equity guarantee in place, it is theoretically possible for the amount of the loan to overwhelm the value of the house.

It is therefore to the borrower’s benefit to ensure the rate of interest is kept as low as possible. Even the difference of half a percent, over the twenty to thirty year life of a reverse mortgage, can mean the saving of tens or even hundreds of thousands of dollars. Shopping around amongst lenders for the most attractive interest rate and options should be part of every prospective borrower’s homework when considering a reverse mortgage.