A reverse mortgage allows those who are over 65 years of age to unlock the equity in their property to improve their lifestyle during retirement. Defer repayments until you no longer live in your home.
The loan may be taken as a lump sum, an income stream, a line of credit or a combination of these options.
Repayment Options
Compound Interest
Interest is charged like any other loan, but you usually don’t need to make repayments while you live in your home.
You will be charged interest on the loan amount you borrow. Fees and interest are added to the loan balance as you go, and the interest compounds. This means you will pay interest on your interest, plus on any fees or charges added to the loan. Over time, the amount you owe the lender will increase, and the longer you have the loan, the more the interest compounds and the bigger the amount you will have to repay.
Extra Repayments
The loan must be repaid in full if you sell your home or die or, in most cases, if you move into aged care. Typically, you are charged a higher interest rate on a reverse mortgage than for a standard home loan.
However, you can pay down the loan at anytime or make regular repayments so that you can manage capitalised interest payments. This not only reduces the amount you owe but lowers the amount of interest you repay. Making extra repayments regularly, even small ones, is the best way to pay off your home loan quicker and save on interest charges.
Other Features
Lower Value Ratios
Loan Value Ratio’s for these type of loans are usually lower then regular mortgages. These depend on the lenders appetite for these type of loans.
Negative Equity Protection
All lenders are required to provide negative equity protection which means that you can’t end up owing the lender more money then your home value.
What you should know
Benefits
- Your lifestyle can be maintained during retirement
- There are no ongoing monthly loan repayments, as the full debt is not paid until your home is sold or other investments clear your debt.
- You may be able to invest a lump sum amount through a financial planner that will help you manage the reduction of the loan.
You should be aware of
- these type of loans attract higher interest rates and fees then regular home loans
- the debt can rise quickly as interest compounds
- the loan may effect your loan eligibility
- you may not have enough money for your aged care or other future needs
- if you fix your interest rate then the cost to break this could be high
