There are currently over a hundred home loan policies available to borrowers in the market, but a reverse mortgage has a very limited number of lenders and policies to choose from – it is also not available in all areas.
Apart from its limited reach, reverse mortgages also have different terms and conditions. Some are explained below:
Ownership
Home owners who take out a reverse mortgage retain full ownership of their property for the entire life of the loan. The only time the borrower would lose their home is if they breach the terms of the contract or when they voluntarily give up ownership or die.
Loan to value ratio
Loan to value ratio (LVR) is the amount of money that would be accessible to the borrower when they take out a loan. In the case of reverse mortgages, the LVR is calculated against the portion of the property the borrower owns and their age.
For instance, if a 60-year-old may only access 20 per cent of their home’s equity and they have only paid 80 per cent of their current mortgage, only up to 20 per cent of the 80 per cent equity in their home may be borrowed.
Reverse mortgages usually have variable interest rates that are around 1 per cent higher than usual home loan rates. The Australian Securities and Investments Commission has a free reverse mortgage calculator that can show potential borrowers just how much the different rates can eat up the equity of their home.
Loan income
Once the loan is approved, the borrower may take the income as a lump sum, income stream, a line of credit or a combination of any of the three.
However, borrowers should be aware that income from reverse mortgage can affect their age pension income depending on what they use the money for. For instance, the age pension would be safe if the loaned money was used to pay down debts, but it could decrease or even cut off pension if they purchase an asset, such as a car or a smaller house.
It is important that borrowers speak to a Financial Information Service officer to know what could be at stake.
Loan payments
Unlike usual home loans, home owners can rest assured that the lender will neither require regular payments nor take their home as long as they are still living in it and they did not breach the contract.
The borrower may make payments if they wish to; however, reverse mortgages typically take payments from the proceeds of the property’s sale once the loan is terminated. The lender may only take the amount that covers the principal and interest payments and accompanying fees so any amount in excess is given back to the borrower.
Costs
As with any loan transaction, reverse mortgage comes with fees that are added on top of the borrowed amount. Some of these additional costs include establishment fees and monthly or annual fees.
As mentioned earlier, all fees will be taken out of the net proceeds when the property is sold, so it is important that borrowers are aware of any additional fees because it can quickly eat up the entire value of the home.
Termination
The reverse mortgage will only be terminated once the property is sold and the lender receives the full payment. Since there is no risk in defaulting due to inability to make regular payments, the only way a borrower could default on their loan would be if they breach the terms of the contract or committed fraud.
Apart from the above, the two most common reasons for termination are moving out and death.
- Moving out: This could be either moving out to downsize or enter an aged care facility.
- Death: Once the borrower dies, the loan is terminated, non-title holder residents must move out and the property is sold, unless certain conditions have been set to delay selling the property for the sake of the surviving dependants.
Of course, it goes without saying that if the borrower decides to pay for the loan instead, then it will be terminated once it is fully paid.
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