Reverse mortgages are loans for pensioners and retirees that are designed specifically for older borrowers who are typically ‘asset rich’ but ‘cash poor’. Known variously as ‘senior’s loans’, ‘reverse home loans’, and ‘senior’s finance’, reverse mortgages are the most popular form of home equity release in Australia.
Reverse mortgages allow people from the age of 60 to convert the equity in their property into cash for any worthwhile purpose. No income is required to qualify. Although interest is charged like any loan, the borrower is not required to make repayments (although they can usually make voluntary payments if they wish).
As with normal home loans, a reverse mortgage is secured by first registered mortgage over the borrower’s house. The amount of equity that can be released is determined by age and the value of the security property (although lenders have different policies on how much they will lend). Crucially however, the borrower retains full ownership and is able to stay in their home as long as they want.
The interest is ‘capitalised’ -charged back to the loan account – and will compound over time ie; the balance of the loan will increase unless voluntary payments are made.
The debt, including all interest and fees owed, is repaid to the lender when:
Reverse mortgage loan products are becoming more flexible and increasingly sophisticated as the market develops. It depends on which lender you choose, but at the moment the borrower can take the funds either as:
In the past lenders offered a range of different interest rate options, including fixed, capped, and variable.
However today there are only variable interest rates available for reverse mortgage loans.