No doubt you’ve heard of a mortgage, but a lot of Aussies are still in the dark when it comes to understanding ‘reverse mortgages.’ In this piece we’re going to go through absolutely everything that you need to know about “reversing” a mortgage and whether or not it’s the right decision for you to make.
In this story…
What is a Reverse Mortgage?
Put simply, a reverse mortgage is a loan that lets you access the value of your home. A homeowner that owns their property outright can borrow against the value of their home and receive funds in a variety of different forms, be it a lump sum of cash, a line of credit or a recurring monthly payment.
It’s worth noting that you can only access a reverse mortgage in Australia after you turn 60 and you have to own your property outright.
Basically, if you’re over the age of 60 and you’re looking to access the money tied up in the “paper” value of your home, a ‘reverse mortgage’ is a great way to substantially increase your cash position. Because you already own the asset you’re borrowing against, reverse mortgages tend to be a good deal less risky than traditional loans, because the outstanding value of the loan can always be covered by selling the property.
With this being said, reverse mortgages are not without their risks and anyone looking to access the unencumbered value of their home needs to have a good understanding of the basics.
Why Did Big Banks Stop Issuing Reverse Mortgages?
Reverse mortgages have gotten a bad wrap over time. In 2019, all major Australian banks stopped offering reverse mortgage products. In response to the “toxic sales culture” of reverse mortgage lenders, the Australian government began introducing stricter regulation around these sorts of products. Historically, opportunistic lenders have used reverse mortgages to take advantage of financially insecure or cash-poor elderly clientele.
Horror stories of senior citizens being charged massive fees, and recently widowed spouses being forced to sell their life-long home, and oblivious heirs being left to pick up a massive bill instead of receiving an inheritance drew attention to the potential pitfalls of accessing a reverse mortgage. However, like all debt-related financial instruments, reverse mortgages can be extremely useful if you know what you’re doing and you know how to spot potential red-flags.
So let’s break down exactly what you need to know about reverse mortgage products in 2022.
Is A Reverse Mortgage Really Worth the Risk?
Accessing a reverse mortgage can be a really great way of getting some extra cashflow during your later years, however it really should be seen as a “last resort” rather than a healthy part of a normal retirement plan.
The ability for reverse mortgage loans to get out of hand can become a problem, especially if clients are completely reliant on the loans as their only real source of extra cash. If unexpected and expensive healthcare issues continue to show up, or other financial concerns of a repetitive nature occur, relying solely on a reverse mortgage can become quite dangerous
Because you’re borrowing against the monetary value of your home, every time you take out another lump of cash, you’re decreasing your level of home ownership, signing up to interest rates and fees that compound over time and potentially leaving substantially less value behind as inheritance for your family.
Best Australian Reverse Mortgage Lenders Ranked
The title of ‘best reverse mortgage lender’ in Australia goes to Household Capital, a financial organisation that specialises entirely in reverse mortgages.
Household Capital offer the industry’s lowest interest rate of: 4.95% & the application fee costs $950.
Obviously, you don’t pay monthly fees with a reverse mortgage but it can still be a good metric to measure exactly how much you end up paying when your house is finally sold.
Household Capital’s comparative monthly cost-incurrence on a loan of $150,000 at a 25-year period, ends up at a rate of: $1,069 a month.
A potential downside for Household Capital is that they only allow customers to borrow a maximum of 50% of the value of their home.
If you’re interested in getting more information on Household Capital, you can read more on their blog.
G&C Mutual Bank
The silver medal belongs to G&C Mutual Bank, who offer a product called the ‘Retirees Access Home Loan’. This product offers slightly higher interest rates than Household Capital, however there are differences in the loan conditions that may be seen as advantageous for some.
G&C Mutual Bank offer the second lowest interest rate of: 5.22% and the application fee costs $500.
G&C Mutual Bank’s comparative monthly cost-incurrence on a loan of $150,000 at a 25-year period, ends up at a rate of: $1,102 a month.
Despite, having a slightly higher comparative rate than Household Capital, G&C does offer a potential upside of “no maximum loan value”. Meaning that depending on certain rules and regulations, customers can borrow up to 80% of the value of their home, allowing for much greater access to capital.
If you’re interested in getting more information on G&C Mutual Bank reverse mortgage products you can check out their website.
Heartland Reverse Mortgages
The bronze medal goes to Heartland Reverse Mortgages, a retirement-oriented financial institution that specialises in reverse-lending products.
Heartland Reverse Mortgages offers the third lowest interest rate of: 5.6% and does not charge an application fee. In place of an application fee however, Heartland charge a settlement fee of $495 and an additional discharge fee of $395.
Heartland Reverse Mortgage’s comparative monthly cost-incurrence on a loan of $150,000 at a 25-year period, ends up at a rate of: $1,150 a month.
A potential advantage to Heartland is that they do offer a comparatively easy “lump sum payment” option, meaning that borrowers and can take out the entire sum that they desire up front. Obviously taking out large sums all at once can be very risky, but depending on your unique financial circumstances, this may be a factor that separates Heartland from the rest.
If you’re interested in seeing more on Heartland, check out their website.