Unlock the value of your home with a reverse mortgage

Over the past few years, the market in reverse mortgages has been steadily increasing in Australia. However, while reverse mortgages have become increasingly popular, few really understand what they are. Here we take a look at reverse mortgages, including their benefits and potential risks.

What is a reverse mortgage home loan?

A reverse mortgage loan simply provides a way for asset rich, yet cash poor individuals to unlock some of the equity in their homes and use the cash for other purposes such as going on an overseas holiday, buying a new car, supporting an infirm or invalid partner or other family member or redecorating. Reverse mortgages may also be referred to as equity release products. Reverse mortgages are aimed at retirees and others who own their own homes and would like extra cash.

How do reverse mortgages work?

A reverse mortgage can provide you with a cash amount taken against the equity in your home. The amount that can be borrowed as a reverse mortgage will be a portion of the borrower's total equity in the property. Generally, no repayments are required until the property is sold or after the death of the last surviving owner of the property. At this time, the lender will receive the full repayment of the loan including interest and any fees and charges.

While reverse mortgages sound like a great idea because borrowers can access money without the need to repay it, there are potential risks involved in taking out a reverse mortgage.

Potential risks of reverse mortgages

There are several considerations that anyone thinking about taking out a reverse mortgage will have to make.

Firstly, if the property is not jointly owned, there is the potential for a spouse to be forced from the family home if the property owner dies.

There may also be problems if the value of the property does not rise significantly over the term of the reverse mortgage. For example, there may not be enough money left over from the sale of the property for more elderly retirees to move into a retirement home.

Receiving a lump sum amount from a reverse mortgage may also reduce, or completely wipe out, any Government Centrelink benefits.

And of course, there are also issues for any surviving children, as the value of the estate could be significantly reduced.

The benefits of reverse mortgages

While there are potential risks, the benefits of reverse mortgages are obvious. It allows those with a large amount of equity tied up in their home to receive money to use for whatever purpose they like. For this reason, reverse mortgages in places like Sydney and Melbourne are popular as these cities have large numbers of people who have large amounts of equity tied up in their homes.

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