Find out more about whether a reverse mortgage can work for you.
When it comes to finding extra money in retirement, many Australians consider tapping into their home equity through a reverse mortgage. This option allows you to borrow money against the value of your home without having to sell it.
While this might sound like a good deal, it’s important to understand both the benefits and the risks before making a decision. Here’s a plain-language guide to help you navigate the pros and cons of reverse mortgages.
What Is a Reverse Mortgage?
A reverse mortgage is a type of loan available to homeowners aged 60 or over, allowing you to convert some of the equity in your home into cash. Some lenders might have a higher minimum age requirement, typically around 62 or 65. Unlike a traditional mortgage where you make regular payments to the lender, with a reverse mortgage, the lender pays you. The loan, including interest and fees, is usually repaid when you sell your home, move into aged care, or pass away.
The Pros of a Reverse Mortgage
- Access to Cash: One of the main advantages of a reverse mortgage is that it provides you with access to cash. This can be especially helpful if you have limited income but have significant equity in your home. You can use this money to cover living expenses, medical bills, home improvements, or even to travel and enjoy retirement.
- No Regular Repayments: Unlike a standard mortgage, you don’t need to make monthly repayments. This can relieve financial pressure and make it easier to manage your budget.
- Stay in Your Home: A reverse mortgage allows you to stay in your home while accessing some of its value. This is important for many people who want to remain in a familiar environment during their later years.
- Flexible Payment Options: You can choose how you receive the funds, whether as a lump sum, a regular income stream, or a line of credit to draw on as needed.
The Cons of a Reverse Mortgage
- Interest Adds Up: While you don’t make regular payments, interest is still charged on the amount you borrow, and it compounds over time. This means the amount you owe can grow quickly, reducing the equity left in your home.
- Impact on Inheritance: A reverse mortgage reduces the value of your estate. If leaving an inheritance to your loved ones is important to you, this is a significant factor to consider.
- Costs and Fees: Reverse mortgages can come with higher interest rates and fees compared to standard home loans. These costs can add up, further reducing the equity in your home.
- Reduced Government Benefits: The money you receive from a reverse mortgage could affect your eligibility for government benefits, such as the Age Pension. It’s important to check how this might impact your financial situation.
Is It the Right Choice for You?
Homeowner investment. Photography William Potter via Shutterstock
A reverse mortgage can provide financial relief, but it’s not a decision to be made lightly. Consider the long-term impact on your financial security and discuss your options with a financial adviser. They can help you weigh the pros and cons based on your individual circumstances and explore other alternatives if needed.
Remember, your home is likely your most valuable asset. By making an informed decision, you can better secure your financial future in retirement. And for those planning on retiring soon, here is our guide on how to know when you can afford to retire. And read about The Rise of SKI: How Baby Boomers Are Spending Their Kids’ Inheritance.
