Many seniors have spent years building equity in their homes, but once they reach their retirement years, they find that their cash funds are limited.
Many seniors have spent years building equity in their homes, but once they reach their retirement years, they find that their cash funds are limited. Whether you are looking to supplement your retirement income, paying for healthcare expenses or looking to fund your dream vacation, you may be exploring a reverse mortgage.
This can be a great option to access the cash you need without selling your home or limiting your lifestyle. Before applying for a reverse mortgage loan, here is what you need to know.
What Exactly is Reverse Mortgage?
These loans are designed to help pensioners, retirees, and older borrowers who are “cash poor,” but have a large number of assets. They are strictly available for personal use or refinancing existing loans that were originally for personal use. Also referred to as lifetime or senior equity loans, reverse mortgages are a popular method used by many Australians over 65 to convert home equity into the cash they need. While interest will accrue like any loan, the borrower will not be required to make payments until the property is sold, or the estate is settled. After you are approved, you have the option to receive funding in one lump sum or to withdraw funds as you need it.
How does it Work?
As with any other loan, it is secured through the registered mortgage over your home. The amount of equity that can be released is determined by both the age of the applicant and the value of the property. Be aware that each lender will have varying policies on the amount they are willing to lend.
It is vital to understand that you must retain full ownership and can remain in your home to obtain approval. Once you receive the loan and begin accessing the funds, the interest will be charged to the loan account. The interest will compound, but you do always have the option to make voluntary payments. However, you can choose to defer payments until the property is sold, you move into an aged care facility, or until the estate is settled after the death of the last surviving borrower.
What to Consider before Applying
There are both benefits and drawbacks to consider before you borrow against the equity of your home.
1. Avoid Borrowing too Much: Make sure to shop around for the best interest rates and find one that offers “no negative equity.” This protects you from borrowing more than the total value of your home.
2. Do your Research: Seek advice from an objective financial advisor to help you weigh all your options.
3. Discuss your Options: This is a decision that will affect your partner, your future, and your children. You want to be sure you have a financial plan for your golden years and to avoid leaving substantial debts for your loved ones.
4. Contact Centrelink: Pension payments often account for a large portion of retirees’ income. Be sure to contact Centrelink before taking a reverse mortgage to see if it will negatively impact your benefits.
5. Be Wary of Upselling: You are not required to purchase additional products or services to receive this loan, so be cautious of any “special” offers.
How to Apply
To be eligible for a reverse mortgage, you must:
– Be over the age of 65.
– Hold the title and reside in the property.
– Obtain independent legal advice and sign a Statutory Declaration.
The application itself is relatively simple. You will need your personal information, income details including debts and assets and details of your ongoing living expenses. If you want more information about reverse mortgage loans, you can contact the Australian Securities and Investments Commission (ASIC) through their consumer website known as FIDO. Visit our loan options section for other financial assistance.
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