Reverse mortgages

A reverse mortgage can help fund your retirement. CHOICE outlines the risks.
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02.How reverse mortgages work

  • The amount you can borrow is dependent on the lender's loan-to-value ratio (LVR). This generally ranges from 10% of the home's value for someone aged 60, to as much as 40% for someone aged 80 (such as $50,000 to $200,000 for a house worth $500,000).
  • Usually no repayments are necessary until you sell the house, move out permanently or die.
  • If your home is owned jointly with a partner the loan usually must be in both names, and is only repayable when the last surviving partner dies or moves. If only one partner of a couple owns the house or a family member lives with you, a reverse mortgage may not be suitable, as it normally becomes repayable when the borrower moves out permanently or dies. However, some contracts protect the right of a resident who isn’t the borrower to stay in the house after all borrowers have died — if this is what you need, make sure you find a lender whose contract covers it.
  • You can access the proceeds of a reverse mortgage as a lump sum, regular amounts (such as monthly), a combination of both or flexible drawdowns (different amounts can be drawn down over time as you need them). Some companies also offer a cash reserve facility, where you can store extra funds without paying interest if you don’t use them. Not all lenders offer all options and there can be fees per drawdown. If you decide on regular payments or flexible drawdowns, check the conditions under which the lender can stop payments.
  • Interest rates: generally the interest rate is variable, but some lenders offer fixed rates either for a set number of years or your lifetime. Fixing the interest rate gives you a sense of certainty, however, a lender may apply expensive fees (called ‘break costs’) if you pay off the loan before the end of a fixed-rate period. Check whether the break costs also apply if you need to move into long-term aged care or die.
  • With a reverse mortgage the title of the home stays in your name and you’re responsible for all ongoing costs, such as rates and maintenance.

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National Information Centre on Retirement Investments (NICRI)

In February 2009, the National Information Centre on Retirement Investments (NICRI) launched a telephone service providing independent information on equity release products such as reverse mortgages. Within four months its Equity Release Reverse Mortgage Information Service (ERRMIS) had answered more than 3000 calls. Some have been from consumers who have a reverse mortgage with lenders that have left the market. Some customers have been refused mortgage top-ups, which means they have to look at switching to another lender and paying set-up costs such as fees for loan establishment, valuation and independent legal advice a second time.

In the worst case, customers are locked into a fixed-interest rate product, as leaving the lender would mean incurring a break fee of tens of thousands of dollars (see Broken by the break fee). Volatile interest rates in the past year have highlighted the potential risks of fixing the rate.

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