We all know what a regular mortgage looks like. You take out a loan with a bank to get the finance to purchase a home, then pay off the loan with interest over time while having the benefit of living in the property and treating it as your own, subject to the mortgage to the bank. Every repayment you make, increases the equity you have in your property.
A reverse mortgage is essentially the opposite, you already own the home but take out a loan to finance renovations, medical or other expenses, but never make any repayments and the bank over time gets an increasing amount of equity in your property. Unfortunately for some, they reach retirement being asset rich but cash poor and it might be that this type of arrangement is the only way to free up some often much needed funds for medical or other expenses.
It is important in this situation that consideration is given to all the potential flow on effects of a reverse mortgage. Independent legal and financial advice are vital. Reverse mortgages could have an effect on eligibility requirements for the aged pension, aged care funding, estate planning and administration, the ability for family members to remain living in the home if the owner has to move into aged care, and your ability to make decisions regarding your own home without the financer’s approval. The interest rates will more than likely be much larger than a regular home loan and compounds over time, so the repayment amount gets larger the longer the loan remains unpaid. This type of loan is usually repaid once the property is sold either when the homeowner moves into aged care or after they pass away. There may be other options that could be explored such as a loan from a family member or selling a portion of the property to an intended estate beneficiary. Before entering into a reverse mortgage, ensure that you obtain appropriate legal and financial advice and consider all the potential issues.
KC Hilton, WNB Legal