Reverse mortgage and home equity release: ..Tapping into your home's value
Picture this: you're a homeowner aged 60 or older, and suddenly, the equity in your home becomes a gateway to the money you need. Sounds intriguing, right?
In this blog article, we'll have a discussion about reverse mortgage and home equity release, the responsibilities and potential long-term consequences associated with reverse mortgages. Our primary aim is to ensure that you possess the necessary information to make well-informed decisions, as we acknowledge the significant importance of your financial future.
If you are a homeowner aged 60 years or older, a reverse mortgage allows you to borrow money using the equity in your home as security. A reverse mortgage can be a great way to access money, however it is crucial for you to understand the obligations and potential long-term implications that come with it.
What is a reverse mortgage?
A reverse mortgage lets you access some of the equity in your home, while you continue to live in your home. ‘Equity’ is the value of your home, less any money you owe on your mortgage. The amount you can borrow depends on your age, the value of your home, and the type of equity release. You may be able to obtain the equity release in the form of a lump sum, regular income (e.g. weekly, fortnightly or monthly) or a line of credit.
Unlike a traditional loan, you are not required to make repayments to your lender while you are living at home. Once you sell your property or if you pass away, the reverse mortgage loan will need to be repaid to your lender in full.
The sale proceeds of your property are commonly used to pay the balance of the loan, including the accrued interest, and any associated fees. However, it is important for you to realise that interest and fees accumulate over time, which can add considerably to your loan balance. Any remaining equity in your home will go to you, or your heirs if you have passed away.
With the above in mind, it is important for you to remember that your home is a significant source of your equity, so you need to carefully consider the advantages and potential implications relating to your current and future circumstances.
What are the advantages of a reverse mortgage?
A reverse mortgage can help you achieve immediate financial objectives or create a general safety net for your living expenses. This means that you might be able to maintain or improve your current living arrangements with less financial stress in the short-term.
You will also be protected by the enhanced consumer protections introduced by the Australian government in 2012. These changes introduced a ‘no negative equity guarantee’ to the National Consumer Credit Protection Act 2009 (Cth), which means that you will be protected from owing your lender more on your reverse mortgage than the value of your home.
What are the potential Implications of a reverse mortgage?
There is a risk that you may be left with insufficient equity in your home to pay for future financial needs if you do not forward-plan. The impact of compound interest over a long loan term can significantly impact the amount of equity retained in your property.
A reverse mortgage may impact your eligibility for the age pension or other government benefits. Commonly income and asset tests are a prerequisite to such benefits, and any amount received under a reverse mortgage will likely form part of these tests.
It is also important to consider your partner or another who you are residing with. If you were to pass away and lack sufficient assets in your estate, the loan balance of a reverse mortgage might have to be paid through selling the secured property.
Engaging a Solicitor
Long-term effects of a reverse mortgage are difficult to predict and can become overwhelming. As experienced solicitors in this area, we regularly provide advice to individuals who choose to attain a reverse mortgage. Most banks and financial institutions in South Australia require that you obtain a Reverse Mortgage Certificate, which provides independent legal advice to ensure that you are fully informed of the legal implications of a reverse mortgage. This provides assurance to the lender and gives you the opportunity to ask any questions regarding loan documentation.
Our expert solicitors will guide you through reverse mortgages
Your financial future is important, and our experienced team is here to help you understand reverse mortgages.
Call: (08) 7325 0219