Reverse Mortgages - Myth Busting
Reverse mortgage is a term that for some people is loaded with a range of emotions, and sometimes misconceptions. These words sometimes elicit suspicious or hostile reactions, and yet for others they represent a solution to a range of retirement problems.
A lot of negative history about reverse mortgages stems from the late 1990s and early 2000s when reverse mortgage products were in their infancy.
In recent years, since the passing of the National Consumer Credit Protection Act (2012), reverse mortgages are much more rigorously regulated – in fact, they are now one of the most stringently regulated credit products in Australia, with explicit protective measures in place for consumers at both the start and end of the loan process.
At Household Capital we offer a Household Loan, which is a type of reverse mortgage. Importantly, all customers are protected by robust legislation that did not exist in the 1990s.
So, what are some of the major misconceptions or myths that are circulating about reverse mortgages?
Myth one: I can lose my home
You will not lose your home – and you can live in your home as long as you choose. Your home continues to be your home, and you retain ownership of the title. There is no risk of default with your home, because you do not need to make regular payments, and a lender cannot forcibly remove you from your home. You do, however, need to abide by the loan’s terms and conditions, which will include things like keeping up-to-date on insurance and rates payments and keeping your home well maintained.
Myth two: I could end up owing more than my home is worth
This is a real furphy – this is not possible, and you are well protected by law: the ‘no negative equity guarantee’ (NNEG) clause in the National Consumer Credit Protection Act (2012). At the end of your loan, you cannot owe more than your home and property is worth, no matter what occurs to the value of your property.
Myth three: I’m disinheriting the kids
Accessing home equity will allow you to provide financial assistance to your children or grandchildren if needed. People are living longer, which requires more proactive financial planning for retirement. This allows you to choose the timing of a bequest, which can have major benefits for your family.
Myth four: A reverse mortgage is a ‘last resort’
Most people entering retirement have more savings (or equity) in their home, than they have in superannuation. A reverse mortgage allows you to better plan for your retirement, and improve your wellbeing and lifestyle – all without having to sell your home. A Household Loan provides you with flexibility and choice, and enhances your ability to retire in comfort.
Myth Five: There’ll be nothing left to cover aged care costs
The dollar amount you can borrow depends on the ‘loan to value ratio’ (LVR), a calculation that uses the value of the property and the age of the youngest borrower. LVR calculations for reverse mortgages are conservative – for example, the LVR for a Household Loan starts at 15 per cent for someone aged 60 and increases one per cent per year thereafter.
As such, if you need to move into residential aged care in the future, you should retain sufficient equity in your home to fund your aged care requirements.
Myth six: It’s better to get equity from your home by downsizing
Myth six: Downsizing is a better option for accessing equity
A lot of Australian retirees are opposed to downsizing, because they are emotionally attached to their current home, and it allows them to host family and friends. There are considerable costs involved in selling a house that need to be considered, both financial and social.
Selling your home may also impact your eligibility for the Age Pension.
Myth seven: I already have a mortgage so I can’t get a reverse mortgage
In many situations, Household Capital can refinance mortgages (and reverse mortgages). Bank mortgages need to be repaid monthly, which can have cash flow implications for retirement, and the risk of default if you can’t meet those payments. A Household Loan provides financial flexibility for retirement, without the risk of a bank foreclosure.
If you love your home and want to live there for as long as possible in retirement, a Household Loan can improve your retirement funding and help you Live Well At Home.
Learn more about reverse mortgages at Household Capital by downloading our free 'what is a reverse mortgage' eguide.
Download Free Guide
Applications for credit are subject to eligibility and lending criteria. Fees and charges are payable and terms and conditions apply (available on request). Household Capital Pty Limited is a credit representative (512757) of Mortgage Direct Pty Limited ACN 075 721 434. Australian Credit Licence 391876.
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