Mortgage Twist

What is a reverse mortgage?

You know how a normal mortgage works: A bank lends you a stack of money to buy your home. As you pay it off month by month, the bank owns less and less of the equity in your house and you own more and more. Picture the process in reverse. You start off owning your home, but then you effectively sacrifice some of the equity in your home in exchange for a lump sum of cash from the bank. That's a reverse mortgage.

Why would I want to do that?

Australia has a liquidity problem. Many people reaching retirement age are rich in terms of assets, because very often they own their own home but they haven't saved enough to support themselves adequately in retirement and don't have a regular cash-flow. What can you do apart from selling your home? One option is a reverse mortgage.

You get a lump sum, which you invest in an annuity, and that loan is secured against your home. Interest and fees accrue on the loan over time but in theory you get to keep your exposure to capital gains from the house itself, which ideally (but by no means certainly) will cover the redemption of the loan.

And when is the loan due?

Usually, upon death, or upon vacation or sale of the property. Often in these circumstances, the executor of your Will then sells the property to repay the loan (or you do, if you've moved into long term aged care, for example). Whatever is left over, if there is something left over, goes to your Estate.

Can I be kicked out of my house when the loan balance gets too big?

Depending on the product, but usually the outstanding loan balance can never be more than the value of the house.

Isn't this spending the kid's inheritance?

Very probably. The whole issue of reverse mortgages is necessarily emotional and two things are absolutely vital: that people fully, unequivocally understand what they are buying; and that they have talked it through with next of kin so that they are not relying on the inheritance of a property that they may well not get. The small number of lenders in this area (including CBA and St George) is in part a function of the fact that it never looks good for a lender to be pursuing an outstanding loan from an elderly family or a bereaved family.

Nevertheless, providers think they're giving people an option that allows them to stay in their home and have enough money to be comfortable.

So, do I need a regular income or good job to get one?

There's no monthly repayments so forget about a job or income stream. Instead the lender wants to know how old you are and what your home's worth.

For more information, contact Grant Hodgins