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Reverse Mortgage Update

A little while ago we did an article on reverse mortgages. Due to a number of clients recently contacting us about reverse mortgages we thought it would be a good idea to do an update on our previous article.

A reverse mortgage is a mortgage just like a normal mortgage that allows you to borrow against the value of your house. The main difference is that usually you don’t have to make regular repayments until you move into an aged care facility, sell your home or die. When the loan ends you, or your estate, must repay what's owing, normally this is paid out of the proceeds of sale.

Reverse mortgages are normally used to allow retirees to use property as security for loans despite the fact that they do not meet the income requirements for normal home loan financial products. 

Each year the fees and interest you would ordinarily pay are added to the loan balance. Over time, you're charged interest on the interest (or compound interest) and that builds up the total amount you owe. Repayment of the loan is not required until the property is sold or the borrowers die.

What are the advantages of a reverse mortgage?

  • You don't need a current income;
  • It gives you access to cash as a lump sum, a regular income or a combination of both;
  • Normally you don't have to make any regular repayments while you live in your own home; and
  • You get to stay in and continue to own your home.

However, as with any loan there are risks with taking out a reverse mortgage loan, such as:

  • Generally the interest rate is higher than average home loans and will accrue until sale of the property or the death of the homeowner;
  • The amount of the loan can rise quickly due to the effect of compound interest;
  • It may also have negative affects to pension eligibility; and
  • It may effect the transition to a retirement home.

The Australian Securities and Investments Commission has prepared a detailed fact sheet which includes a reverse mortgage calculator to assist if you are considering taking out a reverse mortgage. This fact sheet can be found by clicking on the following link - https://www.moneysmart.gov.au/superannuation-and-retirement/income-sources-in-retirement/home-equity-release/reverse-mortgages

Like any substantial financial commitment, it is fundamental that you understand the advantages and disadvantages of entering into such a loan. Cormiston Legal provides independent legal advice to borrowers who are considering a reverse mortgage.

If you need advice on reverse mortgages, please contact us on 03 6332 9353 or use our Contact Us form - http://www.cormistonlegal.com.au/contact

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