Q: I am 67 and have been retired from full-time work for just over a year. I have owned my house for many years and have been thinking about taking out a reverse mortgage so I can go on an extended European holiday. I would prefer not to use my superannuation for this. Are reverse mortgages an option for me?
A: Reverse mortgages are a form of equity release, where you borrow money using your home’s equity as security while you continue to live there.
You don’t have to make any regular repayments on reverse mortgages, making them suitable for older Australians who probably don’t have a steady income. Instead, you have to repay the loan in full (including interest and fees) when you sell your property, no longer live there or pass away.
Reverse mortgages can be taken as a lump sum, a regular income stream, a line of credit or a combination of these options. Because you want the money to pay for a holiday, a lump sum payment or line of credit might suit you best.
Based on the information you’ve given me it seems that a reverse mortgage would be an option for you, however there’s more to consider.
Disadvantages of reverse mortgages
The Australian Government’s Smart Money website outlines some key considerations:
- Interest rates are generally higher than average home loan;
- The debt can rise quickly as the interest compounds over the term of the loan;
- The loan may affect your pension eligibility;
- You may not have enough money left for aged care or other future needs;
- If you are the sole owner of the property and someone lives with you, that person may not be able to stay when you die;
- If you fix your interest rate then the costs to break your agreement can be very high.
It’s important to fully understand how much a reverse mortgage will cost you and how the debt builds up over time. A reverse mortgage calculator can help you with these sums.
I’m personally not a great fan of reverse mortgages as there can be some pitfalls involved, and it’s important you understand all the possible risks of reverse mortgages before entering into one.
Seeking financial advice would also be advisable, and you should talk to your family about the risks.
Your lender should also go into more detail about how a reverse mortgage works, how costs are calculated and cost projections. An accredited mortgage broker can also explain these things to you and help you find a loan that’s right for you if you decide to go ahead.
It may be reassuring to know that a law was passed in September 2012 called ‘negative equity protection’, which means you can’t owe the lender more than your home is worth. This helps safeguard you and your family from ending up in a position of negative equity or owing more than the home is worth.
A reverse mortgage may not be your only option. You didn’t mention details about your home, but perhaps downsizing and using the profits from the sale may be a safer alternative for funding your overseas jaunt.
Have you put much thought to how you’ll be funding your retirement? If you have – let us know in the comments if a reverse mortgage is being considered.
Do you want to ask John a question? Submit it here and check back each Sunday to see if it’s been answered.
If you found this article useful please share it using the buttons below.