02.What to look out for
How reverse mortgages work
Reverse mortgages are aimed at home owners aged 60 and over.
You can use them, for example, to supplement your income with a monthly payment, buy a new car or to pay for a holiday. Essentially you borrow money against the value of your property, but make no regular repayments. The loan is repaid when you move, sell or after your death — and in the meantime, of course, it accumulates compounding interest.
Reverse mortgages are secured against your home. The title stays in your name and you’re responsible for all ongoing costs such as rates and maintenance.
The impact of fees and interest means the loan grows over time. What’s left after it’s repaid depends on factors such as how much your house increases in value, the interest rate and the amount you borrowed.
Features and traps to look out for:
Wide default clauses: with some contracts you can get into default for relatively minor issues like overlooking some paperwork or not punctually paying your rates. Once you’re in default, the lender has the right to ask you for immediate repayment of the loan and can start enforcement action to sell your home.
- The most important protection normally offered is the ‘no negative equity guarantee’. What this means is that you can never owe more than the sale proceeds of the property, even if its sale price doesn’t in reality cover the debt. It’s a vital element of protection for people taking out a reverse mortgage. Make sure your loan offers an unconditional guarantee otherwise the lender may not honour it if you’re in default at the time of the sale.
How much you can borrow depends on your age and the value of the property. At age 60 you can usually get up to 15% of the value, at 80 up to about 35%.
- You can receive a lump sum, regular amounts (such as monthly), a combination of both or use a flexible drawdown (different amounts can be drawn down over time as you need them). Not all lenders offer all options.
Trap Fees can apply to drawdowns, and lenders may stop regular payments if the value of your property diminishes.
Interest rates: variable and fixed rates are available. Fixed-rate loans may be available for terms of between one year and your lifetime.
Trap You may have to pay expensive ‘break’ fees if you repay the loan before the end of a fixed-rate period.
- A range of fees can apply, including setup and annual fees. You also have to pay for regular property valuations (normally every three to five years).
Read our assessment of the contracts and profiles for 23 reverse mortgages.