Reverse mortgages

A reverse mortgage can help fund your retirement. CHOICE outlines the risks.
 
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03.Essential considerations

A reverse mortgage is a long-term commitment you usually keep for the rest of your life. You should take the following into consideration before you sign up to one:

  • Is a reverse mortgage the best option? Could you downsize instead? Will a reverse mortgage affect your eligibility for a pension? To make sure your pension won't be adversely affected, contact the Centrelink Financial Information Services.
  • Talk to your family A reverse mortgage will make a big difference to any inheritance. Could your children help out instead?
  • Consider your possible future needs. Should you need an aged-care accommodation bond, will you still have enough money? Contact the Department of Health and Ageing for information on aged care.
  • Compare loans and features: Which is the best reverse mortgage for you? Do you want regular payments, a cash reserve facility or a lump sum? How flexible is the contract - can you keep your home for a time if you move into aged-care accommodation? Do you want a variable or fixed rate? Compare interest rates, fees and break and exit costs. Even though the lender will own an increasing proportion of your home, remember you'll have to pay for looking after it.
  • Can the lender ask you for a repayment before you die or move out permanently?
  • Compare scenarios Calculate a range of loan amounts, interest rates (including compound) and changes in house value over time, taking your life expectancy into account. There are free calculators at fido - the Australian Securities & Investments Commission's (ASIC) consumer website - and ERRMIS' website.
  • Check the contract and default clauses Are they in plain English or are they hard to understand - would you be in default if you forgot to fill out an annual declaration or broke any of a long list of contract clauses?
  • Can permanent residents who aren't co-owners stay in the home if you die?
  • Disputes Make sure the lender and anyone you deal with (such as the mortgage broker or company managing the mortgage) are all members of an approved dispute resolution scheme. To check, contact the Financial Ombudsman Service or ERRMIS.
  • Get independent legal and financial advice For free information on how to do so, contact ERRMIS.

Reverse mortgage as a last resort 

If you do decide on a reverse mortgage: 

  • Plan for the long term If you take out a reverse mortgage at a relatively young age, the loan will increase over the long term and reduce your options. 
  • Delay taking out a reverse mortgage as long as you can and only take what you really need Taking smaller amounts over a period of time rather than a lump sum will reduce the interest you pay.
  • Understand the downside of fixing your rate Although this gives you greater certainty about future costs, break fees can apply if you want to switch, especially if interest rates fall. 
  • Plan your exit strategy Keep track of your financial situation so you don't miss out on selling your home, repaying the loan and still having enough money left to do what you want to do.

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