Reverse mortgages

A reverse mortgage can help fund your retirement. CHOICE outlines the risks.
 
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01.Introduction

Toy house

Reverse mortgages target homeowners aged 60 and older who want to borrow money against the value of their property.

The advantage of a reverse mortgage is that you don't need to make repayments on the loan until you move, sell or die. However you should be aware that it may restrict the flexibility of your financial arrangements.

Findings

  • While the majority of reverse mortgage products have improved their consumer protection standards there are still traps with most of them.
  • Some customers have missed out on interest rate cuts or loan top-ups because their provider no longer writes reverse mortgages.
  • Some financial institutions have responded to the global credit crisis by suspending their reverse mortgage products. 
  • Step-by-step guide explains how a reverse mortgage works, features to look for and pitfalls.
  • Checklist: What to consider and questions to ask.

CHOICE reverse mortgage standards

Reverse mortgages have come a long way since CHOICE first looked at them in 2004. In 2007 we developed contract standards for reverse mortgages; none of the providers we surveyed then met all these standards. In 2009 (when this report was first filed), all participating providers met the five CHOICE minimum contract standards, but only four met the CHOICE good-practice standard. Two providers, Transcomm and HomeStart, did not participate in the 2009, and based on publicly available information and information we collected from them in 2008, they continue to miss our minimum contract standards, the main problem being they don't stand by their no negative equity guarantee (NNEG) if the borrower is in default. The NNEG 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.

Minimum contract standards

The no negative equity guarantee (NNEG) applies even if you're in default of the contract.
No fixed loan term - the borrower can repay the loan at any time. But unless you're in default of the contract, the lender can only request repayment when the house is sold, you move into long-term aged care or you die.
The lender can't ask you for partial repayments during the course of the loan.
You must get independent legal advice before signing.
The mortgage company and the lender participate in an ASIC-approved dispute resolution scheme.

Good-practice standard

This standard requires that default conditions are clearly defined and the contract does not include any condition that puts you in the danger of default for breaching a minor, unspecified clause in the terms and conditions or contract. Some providers' contracts and terms and conditions are complicated and at times difficult to understand, which could lead to catastrophic consequences if failure to adhere to a minor clause is considered a default condition. If you're in default, the lender can potentially force you out of your home and sell it.

 
 

 

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