One of the most common questions we receive at Seniors First is, “Can I take out a Reverse Mortgage if I already have a mortgage on my property?” The short answer is yes, you can. But the process involves some important steps and considerations.
Below, we’ll break it all down for you.
How Reverse Mortgages Work with Existing Mortgages
A Reverse Mortgage can be a powerful financial tool, offering flexibility and peace of mind for homeowners aged 55 and above. Unlike traditional loans, Reverse Mortgages don’t require regular repayments, making them particularly appealing to retirees.
If you already have a mortgage on your property, that’s not necessarily a barrier to getting a Reverse Mortgage. However, there are specific steps that must be taken:
1. The Lender Takes First Mortgage Priority
When you take out a Reverse Mortgage, the lender will require a first mortgage over your property. This means that any existing mortgage must be paid off during the settlement process.
2. Refinancing Your Existing Mortgage
As part of obtaining a Reverse Mortgage, you’ll refinance your current home loan. This involves paying out your existing mortgage, even if the balance is small or almost paid off.
3. The Settlement Process
During settlement, funds from the Reverse Mortgage are used to pay off the outstanding mortgage. Your Reverse Mortgage lender will work with your current financial institution to arrange the payment. Your chosen lender may also require you to complete a Discharge Authority form, which releases the current security tied to your property.
4. Accessing Additional Funds
After paying off your existing mortgage, you may still have access to additional funds from the Reverse Mortgage, depending on your age and property value.
[ ALSO READ: 7 Common Myths About Reverse Mortgages – and the Truth Behind Them! ]
Benefits of Refinancing with a Reverse Mortgage
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- Eliminating Monthly Mortgage Payments
If you’re finding it challenging to keep up with regular mortgage repayments, refinancing with a Reverse Mortgage can provide immediate relief by eliminating these payments. - Consolidating Debt
Reverse Mortgages allow you to consolidate debt and free up cash flow, offering greater financial stability as you transition into retirement. - Accessing Equity
Depending on the value of your property and your maximum Loan-to-Value Ratio (LVR), you might be able to access funds beyond the amount required to pay off your existing mortgage, giving you financial freedom for other needs.
- Eliminating Monthly Mortgage Payments
- Stay in the home you love. A Reverse Mortgage can help you avoid selling the property and downsizing.
Things to Consider
1. Debt on Other Properties
If you have a mortgage on another property not used as security for the Reverse Mortgage, this debt will still factor into the lender’s assessment but may not need to be paid off.
2. Outstanding Debt Exceeding Eligibility
If your existing mortgage debt exceeds the maximum amount you qualify for based on your property value and age, you may not be eligible for a Reverse Mortgage.
3. Impact on Financial Planning
- Equity Reduction: Over time, the equity in your property will decrease if you make no repayments on the Reverse Mortgage.
- Inheritance: Consider how this will affect the amount of inheritance you plan to leave.
- Pension and Aged Care: Reverse Mortgages may impact your Age Pension eligibility and aged care affordability.
Potential Drawbacks
- Higher Costs
Reverse Mortgages often come with higher interest rates compared to traditional loans due to the lender’s increased risk. - Equity Erosion
The longer the loan remains unpaid, the more your home’s equity will be reduced. This could limit your future financial options. - Suitability
If you can comfortably manage regular mortgage payments and don’t require extra funds, a Reverse Mortgage may not be the right financial solution.
[ ALSO READ: Reverse Mortgage Case Study: How Vince Saved His Home and Regained Financial Freedom ]
Is a Reverse Mortgage Right for You?
Deciding to take out a Reverse Mortgage is a significant financial step that requires careful consideration.
If you’re unsure, we recommend speaking with our team to understand how a Reverse Mortgage could impact your retirement income and eligibility for government benefits.
For more information or to see if a Reverse Mortgage might work for you, contact us at Seniors First today.
Call us on 1300 745 745 or you may also DOWNLOAD OUR FREE REVERSE MORTGAGE GUIDE.
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.