How do Reverse Mortgage interest rates compare?
At this present moment in Australia, standard home loan interest rates are charged between 2% to 3%. Personal loan interest rates are charged between 9% to 12%, and sometimes more depending on the bank you have the loan with. And Credit card loan interest rates are charged between 12% to 22%.
Most people think, a Reverse Mortgage rate would be higher, however reverse mortgage loans are currently around 4.5% to 6% at the present moment.
If you look at the 4 most common types of lending below, it helps to explain the difference.
Standard Home Loans: These loans assess your income, and determine a reasonable amount you can afford to repay every fortnight or/ month. From the lender’s perspective, they have the security of an asset that is likely to grow in value, with a debt which is reducing in value over time (due to your principal & interest monthly repayments). Note – Banks and lending institutions will not assess the age pension as income.
Personal Loans: These loans assess your income, and determine a reasonable amount you can afford to repay every fortnight or/ month, with a set repayment schedule. They are typically smallish loans, for example, personal loans for pensioners are often capped at $5000. They are not secured to a property or asset, so are a higher rate as they are higher risk for the lender.
Credit Cards: These loans assess your income and determine a reasonable amount you can afford to repay every month. However, there is no set repayment schedule, just a minimum monthly amount you must pay. They are not secured to a property or asset and are at an extremely high rate. They are high risk for the lender.
Reverse Mortgage: These loans are based on your age and the value of your property. There are no compulsory regular repayments, the debt plus any interest and fees is usually repaid when the property is sold in future. From the lender’s perspective, they have the security of an asset that is likely to grow in value.
Why is the interest rate for a Reverse Mortgage higher than a standard home loan? Because unlike a standard home loan the lender may not receive any of their capital back for 10 to 20 years – or even much longer. So there is a slight premium to the interest rate because it’s a different level of risk for the lender.
So are Reverse Mortgages interest rates high? It depends how you look at it. They are higher than a standard home loan, and if you are young enough, or have good income, then a reverse mortgage may not be for you. But if you are asset rich and cash poor with limited income, a reverse mortgage is much better than a personal loan or credit card. In fact, paying out credit card debt is one of the most common reasons Seniors First customers first establish a reverse mortgage.
Written by Andrew Cate, NSW State Manager.