A large number of people go through life without making the proper arrangements for life after retirement. At the most, what they have done, is invest in a home for which they have paid off the mortgage or are near to doing so. When they approach retirement they have to depend on savings and investments to help them get through the rest of their life.
Reverse Mortgage: A Method of Finance
This is when they can look at the equity that they have in the form of a home, and look to convert that into a surety against which they can borrow. This process of financing is called a reverse mortgage. Such financing is available only to people who are over a certain age and own most of the equity in the home that they are presently residing in. The borrowed amount does attract interest and other fees, but the seniors who opt for such finance do not have to repay it, till they decide to sell the home or stop using it as a residence. In the case of their death, the home can be released to their heirs if they arrange to pay off the loan and the accrued interest, plus fees. Otherwise, the home reverts to the lender, who will recover costs through sale of the home and then repatriate the balance amount, if any, to the designated heirs.
Reverse Mortgage Can Ease Retirement Woes
A number of people look to go through retired life with pension plans or other savings. This is quite often not enough, especially if they are still paying off a mortgage. In such cases, a person can avail of a reverse mortgage that can help to extinguish the mortgage, and be assured of living in the home without having to repay the borrowed amount. The equity in the home can also leave some leftover amount after completing the mortgage, and this can be taken as a lump sum, or converted into acceptable monthly payments. This helps to increase the income and ease life after retirement. Homes have to be properly maintained once a reverse mortgage is obtained on them and also need to be properly insured. This is to help the lender to have a secured asset that will maintain its value, throughout the period of the loan.
Reverse Mortgage Can Unlock Asset Value
There are also people who have planned well for their retirement and are not in need of any extra income. They may also not have heirs who are depending on them to pass on the asset of a home, and thus the home that they own is an idle asset. They can then convert this asset into cash, through a reverse mortgage, and use this extra income for vacations, home remodeling or any other thing that catches their fancy.
The Process of Reverse Mortgage
Reverse Mortgage products were introduced to Australia over 10 years ago and have become increasingly popular amongst asset-rich, cash-poor seniors who want to remain in their home and still have money to live and enjoy life. Reverse mortgage products allow people over 60 to borrow against the equity in their home. Repayment, including all interest and charges, is not due until the last borrower either passes away or decides to sell the home.
The amount of money seniors can borrow is calculated on two key factors – the agreed value of the property through an independent evaluation, and the age, or the youngest age of a borrower if they are a couple. Typically the maximum a borrower can obtain using a reverse mortgage is 50% of the agreed value of their home. The minimum amount borrowers can access is usually around $10,000.
Reverse mortgages do tend to decrease the value of the assets that one may be passing on to children, grandchildren or other family members who stand to inherit the property. If the heirs do want to hold on to the home after the passing away of the senior or seniors, they will have to arrange to repay the amount borrowed, or arrange for other means of refinancing the loan. If they cannot do this, the lender will arrange to sell the property, recover their dues, and pass on the balance amount to the designated heirs.
Terms of Reverse Mortgage
Fees and charges
Reverse mortgages charge a higher interest rate than regular home loans. Ensure you understand the total fee package, including establishment and ongoing fees. Ask if you can pay the loan off early and if there are any extra fees involved.
Special terms and conditions
Ask if there are any restrictions on what you can do with the money. Find out the maintenance standards the lender expects.
Check if there is a cooling-off period so you can pull out if you change your mind.
Find out what happens if you or your spouse dies, or if you need to transfer the loan to another house if you move. Check if you need the lender’s permission to sell, lease, vacate or renovate your home or have someone move in with you.
If things go wrong
Ask the lender what external dispute resolution schemes they belong to. Then you will know where to go if you have a problem. Find out how to complain if you need to resolve a dispute.