Reverse Mortgages have been available in Australia since the 1990s, but it is only in the recent years that these are becoming popular as a viable financial product for homeowners. Even though reverse mortgages, also known as home equity loan, has drew some flak from the media because of inherent drawbacks, public demand has been increasing because it can really help seniors who are assets rich but cash poor.
But despite of its viability, a home equity loan is not always recommended for everyone. In fact there are certain circumstances where a reverse mortgage can be detrimental to one’s finances. This blogpost will help you explore the proper use of a home equity loan and know whether it is a good idea to get one.
What is a Reverse Mortgage?
Reverse mortgages will allow you to unlock the equity in your home without the need to worry about regular repayments. You can receive the proceeds in either a lump sum, a monthly income, a line of credit, or a combination. This is usually a recommended product for retirees who have already paid off their mortgages and need cash for their expenses such as aged care, debt consolidation, home renovation, and more.
[Related Post: Reverse Mortgages in Australia, Seniors First Video ]
When Is It A Good Idea to take a Home Equity Loan?
Those who are qualified for a reverse mortgage can take advantage of the following:
- Access to cash for your needs
- Tax-free funds with no limits on where you spend the money
- Flexible repayment scheme
- No income qualifications
But despite of these benefits, stricter regulations in Australia requires lenders and brokers to be more responsible in offering reverse mortgages. Hence, not everyone can just take this loan.
In general, retirees who are willing to decrease the proceeds from the sale of their property by the loan amount plus interest charges are ideal candidates. These are usually retirees who want to stay in their homes until they pass away. Retirees who are also looking to decrease their taxable estates may also be ideal candidates for reverse mortgages.
Reverse Mortgage Risks
The following are the risks usually associated with reverse mortgages:
- Interest rates are higher compared to the traditional home loans
- The total debt may quickly rise when you choose a no-regular repayment scheme as the interest may compound over time (You can use our reverse mortgage calculator to know how much money you will owe over a certain period )
- Your heirs will receive less proceeds from the value of your property
- Taking a reverse mortgage may affect your eligibility for pension
Most reverse mortgages also require homeowners to maintain the property in good condition for the duration of the loan. This can be challenging for retirees who have health problems, and paying for maintaining the property can be luxury for some. Therefore, you should always consider this factor and clarify this requirement before making any decision.
If you like to pass your home to your heirs, you should also carefully consider the fine print of reverse mortgages. Thanks to the ‘negative equity protection’ rule, you cannot end up owing the lender more than the value of our home. However, the property may still be repossessed if the balances exceed the value of the home. Your heirs may need to pay the balance before they can re-acquire the property.
Reverse Mortgages Can Help the Right Individual
A reverse mortgage can provide significant benefits for the right person, but you should always consider all the risks and clarify the fine print before taking this type of loan. This is the reason why we highly recommend working with a financial advisor who specialises in home equity loans so you can gain a comprehensive perspective of how reverse mortgages can affect your finances, especially during retirement.
To help you learn more about reverse mortgage, you can download our FREE REVERSE MORTGAGE GUIDE.
You can also call Seniors First Finance at 1300 745 745 or post your comments below.