On 28 August, the Australia Securities and Investment Commission (ASIC) released the results of its review into reverse mortgages. With the number of reverse mortgages rapidly increasing over the last 10 years, it is critical that those who enter into reverse mortgage agreements understand their rights and obligations. Caitlin Meers, Associate with Snedden Hall & Gallop, tells us what we need to know about this special type of loan.
What is a reverse mortgage?
A reverse mortgage is a loan you take out against the equity of your home. You can take the loan as a lump sum payment or, in some cases, a regular income stream. You don’t need to pay back the loan until you sell or leave that home, or upon your death.
During that time, you don’t have to make any payments against the loan amount. However, the loan attract compound interest, which compounds against the initial loan amount for the life of the loan.
Reverse mortgages are generally available only to borrowers over 60 years of age who own their home outright. You can then use the equity in your home and provide your home as security against the loan.
What are the risks?
Like any loan, borrowers must be aware of the repayment terms. According to ASIC, interest rates for reverse mortgages are often higher than normal home loans. Also, because you’re not making repayments during the term of the loan, repayments due at the end of the loan could be significantly higher than you expect.
It’s important that you have an up-to-date will so that, should you pass away during the life of the loan, your executor can deal with your home appropriately after the loan fees are repaid.
The usual reverse mortgage loan cap is around 20–25% of the total value of your home, depending on your age. If you borrow 20% of the value of your house over 20 years, compound interest will probably significantly increase that 20% value.
Over those years, if the value of your home has dropped because of market changes, there may be little equity left in your home. If you were planning to leave some funds to your family, you may be unable to do this after your loan is repaid.
In the worst-case scenario, your executors may discover that the amount of your loan is greater than the value of your home. This means that they may need to sell of other assets in your estate to satisfy your total debt. The Commonwealth government addressed this issue in 2012 and enacted legislation to ensure that this couldn’t occur in future agreements. They did this by creating a ‘negative equity’ provision. This means that the loan cannot be greater than the value of your home.
If you entered into a reverse mortgage before 2012, you should check if your loan documents contain negative equity protection for you. You may also want to seek legal advice about this.
Finally, receiving funds via a reverse mortgage may affect your eligibility to access the pension and other healthcare benefits, any superannuation payments you receive, and your tax obligations and liabilities. It may also affect your available government subsidies if you wish to enter aged care or seek similar medical treatment.
How can Snedden Hall & Gallop help?
You should seek independent legal and financial advice before entering into these loan agreements. This advice should form a key part of your investigations into a reverse mortgage.
We can help you understand your rights and obligations in entering into a reverse mortgage. We can also use our trusted network of financial advisors to help you understand your options. In addition, we can advise you on residential lease agreements if you or your family members are moving into retirement or aged care villages. Contact Snedden Hall & Gallop today on 02 6285 8000 or by email here. You can find out more about our property services and team here.