Top 6 Questions to Ask Before Signing a Reverse Mortgage Contract

If you’re a retiree thinking about a Reverse Mortgage, you’re not alone. It’s a big decision that could impact your financial security and lifestyle. 

In this Seniors First blog, we demystify Reverse Mortgages for Australian seniors, focusing on the crucial questions you need to ask before diving in.

From understanding the costs involved to considering how a Reverse Mortgage will affect your future finances and estate, we aim to provide you with the information you need to make an informed decision. 

1. What is a Reverse Mortgage and how does it work?

Imagine your home has a bit of a hidden treasure, not in gold coins, but in the equity you’ve built up over the years. A Reverse Mortgage lets you tap into this treasure, giving you access to a portion of your home’s value in cash. This means you can bolster your retirement funds without the need to pack up and leave your cherished home.

So, how much can you borrow? It varies, but it’s usually tied to your age and your home’s value. The older you are, the more you can borrow. Typically, you might get access to 15-20% of your home’s value at age 60, and this percentage can increase as you get older.

The best part? You don’t need to make regular repayments. The interest on the loan compounds over time, which means it adds up, but you don’t pay anything back until you sell your home, move out, or the last borrower passes away.

But, it’s not all smooth sailing. The growing loan amount can eat into the future sale proceeds of your home, leaving less for your estate. That’s why it’s essential to get good advice before diving in. 

Types of Reverse Mortgages? They’re pretty standard, but how you receive your funds can vary. You might opt for a lump sum, regular payments, a line of credit, or a combo.

[ Related Post: When is a Reverse Mortgage a good idea: 8 top scenarios ]

2. What are the eligibility requirements

Not all retirees can apply for a Reverse Mortgage loan. Here are the common eligibility requirements: 

Age Requirement

• You or the youngest titleholder must be at least 60 years old (possibly 55 yrs in some cases).
• The amount you can borrow increases with age.

Property Requirements

• The property must be in Australia and usually your primary residence.
• Acceptable property types generally include standard residential homes. However, if your home is unconventional (like a high-rise apartment or large acreage), you’ll need to check with your lender for eligibility.

Financial Health Check

• Lenders will review your credit history and any existing debts to assess your ability to take on a reverse mortgage.
• This check ensures the reverse mortgage is a financially viable option for you.

Future Plans and Estate Impact:

• Lenders are interested in your plans for the loan proceeds and how it might affect your estate or inheritance plans.

Remember, while these points give a good overview, lenders may have additional criteria, so it’s smart to shop around or seek advice from a financial adviser to find the best option for you.

3. What are the costs and fees associated with a Reverse Mortgage?

When considering a Reverse Mortgage, it’s essential to understand all the costs and fees involved. Here’s a breakdown:

• Origination Fees: A one-time charge by the lender to set up the loan.
• Closing Costs: Includes charges for home appraisal, legal documentation, and other initial procedures.
• Interest Rates: The cost of borrowing the money, which compounds over time and adds to the loan balance.
• Ongoing Service Fees: some lenders may charge monthly fees for account management, added to the loan balance and accruing interest.

Each of these costs directly impacts the total amount you’ll owe over the life of the loan. 

4. How will a Reverse Mortgage affect my future finances and estate? 

Applying for a Reverse Mortgage can seem like an easy solution to fund your retirement dreams, giving you access to cash locked up in your home. But, how does it really affect your financial future and the legacy you might leave behind? Let’s unpack this.

Loan Repayments

Unlike traditional loans, you’re not required to pay anything back monthly. The loan, plus interest, comes due when you sell your home, move out, or pass away. This setup can provide financial relief now but remember, the interest compounds over time, increasing the total amount owed.

Home Equity

As the interest on your Reverse Mortgage grows, your home equity shrinks. This means the value of your home that you own outright gets smaller as time goes by. If your home’s value skyrockets, this might not be much of an issue. But if the market is sluggish, you might find a significant chunk of your home’s value is owed to the lender.

Estate Implication

If leaving a legacy or an inheritance is important to you, a Reverse Mortgage requires careful consideration. Your heirs will have options when it comes to settling the loan, like selling the home or refinancing it to keep it in the family. However, the reduced equity could mean there’s less to leave behind than you hoped.

All these factors underline the importance of getting clear, comprehensive advice before jumping into a Reverse Mortgage. 

[ Related Post: Balancing Legacy and Financial Stability: Will a Reverse Mortgage Affect My Kids’ Inheritance? ] 

5. Can I live in my home for the rest of my life?

One of the appealing aspects of a Reverse Mortgage is the possibility of living in your home for the rest of your life, maintaining the comfort and familiarity of your own space as you age. However, there are specific conditions tied to this benefit that are essential to understand.

Primarily, you can indeed stay in your home for as long as you wish, provided you comply with the loan’s terms and conditions. These typically include maintaining the property in good condition, staying up to date with property taxes and insurance, and using the home as your principal residence.

However, certain situations would require the repayment of the loan earlier than expected. These include:

• Moving out permanently: If you decide to move out of your home for more than a specified period, usually around 12 months, for reasons such as long-term care or moving in with family, the loan may become due.
• Failure to meet loan obligations: Not maintaining the home, failing to pay property taxes or home insurance, or otherwise not adhering to the loan terms can trigger repayment.
• Property sale: If you choose to sell the property, the loan must be repaid from the proceeds of the sale.

It’s crucial to have a clear conversation with your lender about these conditions and understand fully how they apply to your situation. 

6. What happens if I change my mind? 

Changing your mind after signing up for a Reverse Mortgage is something many worry about. It’s a big decision, and it’s natural to have second thoughts. Here’s what you need to know about your rights in this situation, including details about penalties and fees for early termination.

Firstly, once you have signed a Reverse Mortgage lender contract you are then legally bound by this. It might be possible to negotiate with a lender not to proceed with the loan settlement, but the lender may then seek to recover costs they have incurred to that point. Such costs may include valuation fees, legal fees and so on.

If you do proceed with the loan but then decide to repay the loan early, there are a few things to consider:

• Early repayment fees: in Australia mortgage lenders are prohibited from charging early repayment fees. So this is generally not a roadblock to paying out the loan soon after settlement, or origination. 
• Fixed rate prepayment cost: Some Reverse Mortgage lenders offer fixed rates. Paying out fixed rate loans early can become very expensive in some cases. If the ‘cost of money’ has fallen since the fixed rate loan was funded and you pay it out before the expected term or duration, the lender will incur a loss. Under the terms of the contract they pass this loss onto the borrower by the way of  ‘prepayment costs’. It’s essential to understand these potential charges before deciding to repay a fixed rate early.

Here’s the good news: many Reverse Mortgage contracts are designed with flexibility in mind, recognising that circumstances change. While there might be costs associated with changing your mind, they are typically not prohibitive, especially if you’re making a well-considered decision that’s in your best interest long term.

Always review your contract details closely and discuss any concerns with your lender before making decisions. If you’re unsure, seeking advice from a financial adviser or legal professional can also help you navigate the process of cancellation or early repayment of your Reverse Mortgage.

Contact Seniors First for more information about Reverse Mortgages or call us on 1300 745 745.

Disclaimer: This article is for informational purposes only and does not constitute financial advice. Please consult a licensed financial advisor before you make any decision.