Opinion
A mortgage where the bank pays you? Yes, but beware the pitfalls
Dominic Powell
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By now, we’ve all got a pretty good handle on what a mortgage is. You ask the bank, like a Dickensian orphan, for a small loan of $1 million to buy a house and they (sometimes) grant it, albeit with some pretty hefty repayments.
But what about if we take this whole concept and reverse it, Missy Elliott-style? With a reverse mortgage, does the bank pay us money to sell a house? Is this a modern-day retelling of Robin Hood?
A reverse mortgage might sound like a good idea, but there are some pitfalls to consider.Credit:
No. Well, sort of. Reverse mortgages and other similar schemes have become increasingly popular – growing about 60 per cent annually – as a way for older Australians to access an income stream via their home, without having to sell it.
Basically, they allow people over the age of 60 to borrow money from the bank using their home’s existing equity (the value of your home minus any money you owe on it) as security. Your bank will make payments to you in either a lump sum or a regular income stream, with the loan being repaid when you sell the house or pass away. Interest is added to the loan balance over time, meaning your debt increases rather than decreases.
You can also opt for a home equity release agreement, which allows you to sell a portion of the value of your home in return for a lump sum or payment stream. The government also runs its own program, known as the Home Equity Access Scheme (HEAS) where age pensioners can supplement their pension with a government loan, again using their home as equity.
What’s the problem?
Reverse mortgages can be useful in many scenarios, either to top up your regular income or to get a lump sum for medical expenses, renovations, or travel without having to sell your main asset.
However, these schemes can have many moving parts, requirements, and restrictions, so it can be challenging to work out if they’re worthwhile.
What you can do about it
As always, your first port of call should be a financial advisor if you’ve got questions, but if you want to know more about reverse mortgages, read on:
- Consider your options: Despite their growing popularity, lead broker at Tiimely Home, Barbara Giamalis, says people should investigate other options first, and consider reverse mortgages as more of a last resort. “Downsizing or relocating to access equity from the sale of your house could be viable alternatives, especially given the current economic climate,” she says. “[Reverse mortgages] are usually considered only when other financial options have been exhausted.” The government has introduced incentives to help older homeowners downsize, including allowing people to put up to $300,000 (or $600,000 per couple) of the proceeds from the sale of their home into super tax-free, so this is certainly worth considering.
- Look into lenders: Finding a lender who will facilitate reverse mortgages can be another hurdle, as the big four banks don’t offer them, leaving it to more specialised companies and smaller lenders. Paul Dwyer, a mortgage broker who specialises in reverse mortgages, says there are currently seven lenders across Australia, with more coming in the next 12 months. As with all loans, but especially with loans from smaller lenders, make sure you look into who is providing the loan and what consumer protections you have. Dwyer recommends seeking advice. “Advisors are important as the product is specialised, and holistic discussion includes age pension, aged care and estate planning matters,” he says.
- Suss out other schemes: Much of the discussion so far has been about reverse mortgages, but the government’s aforementioned HEAS can be a solid option for many, provided you’re at the pensionable age of 67. You get paid fortnightly, and can get as much as 150 per cent of the full age pension entitlement (minus whatever pension you already receive). Dwyer says the HEAS is a great option, given the interest rate on offer of 3.95 per cent is lower than the current 4.35 per cent cash rate. He says a pensioner receiving $1116.30 per fortnight can qualify for an additional $558.15 through the HEAS. “It is amazing the difference an additional $14,511.90 per annum makes to improve living standards and address cost-of-living pressures,” he says.
- Beware the pitfalls: Unlike a mortgage where you slowly eat away at the loan balance, a reverse mortgage sees the loan balance slowly increase over time. This can be bad news later in life, Giamalis warns, as the growing loan amount might mean that if you decide to sell your property, there’s very little left to fund things like aged care or medical expenses. It can also mean there’s not much to leave to your children. “If you are thinking of going down the reverse mortgage path, it is recommended to have that conversation with your family first,” she says.
Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.