Seven reverse mortgage myths busted
Josh Funder sets the record straight on reverse mortgages.
The words ‘reverse mortgage’ incite a range of emotions. For some, they’re viewed with suspicion and hostility; for others they’re regarded as the solution to a problem that elevated a retirement lifestyle.
One of the principle issues seems to be the misconceptions that have proliferated about reverse mortgages. These largely stem from the traditional reverse mortgage products of the late 1990s and early 2000s.
However, following the introduction of the National Consumer Credit Protection Act (2012), reverse mortgage lending is now among the most strictly regulated credit products in Australia, with clear consumer protections and market parameters at both the beginning and end of all loans.
Household Capital offers a Household Loan, which is structured as a reverse mortgage. This means these legislative protections apply to our customers.
So, let’s bust some of those myths that arise time and time again.
Myth one: I can lose my home
You cannot lose your home; instead, you can remain living there as long as you wish. You continue to own your home and retain the title. Because you don’t need to make regular repayments, unlike a traditional home loan, there is no default risk and you cannot be forcibly removed from your home by the lender.
You do need to meet simple obligations; you need to remain living in your home, maintain it and pay the council rates and home insurance.
Myth two: I could end up owing more than my home is worth
That’s not possible. The "no negative equity guarantee" (NNEG) clause in the National Consumer Credit Protection Act, introduced in 2012, means you are protected by law and cannot owe more than your home is worth, regardless of what happens to the value of your property.
Myth three: I’m disinheriting the kids
Retirees are living longer, which means bequests are delayed past the time when your children face their biggest financial needs. Using home equity, you can help your kids and grandkids when they need it most. Choosing the timing of a bequest rather than waiting until death is a desirable option for the whole family.
Myth four: A reverse mortgage is a ‘last resort’
Recently identified by the government as part of the ‘third pillar’ of retirement funding, most retirees have more savings in the family home than in super. A reverse mortgage helps you access the savings in your home to enhance your lifestyle and wellbeing in retirement, without needing to sell your home. Products are increasingly sophisticated, providing you with flexibility and choice, capital and income, to improve your retirement funding.
Myth Five: There’ll be nothing left to cover aged care costs
The amount you can borrow is dependent on the loan to value ratio (or LVR); this is a calculation that uses the age of the youngest borrower and the value of your property. The LVR for a reverse mortgage is conservative – for example, the LVR for a Household Loan starts at 15 per cent for those aged 60 and increases one per cent per year thereafter.
As a result, if in later years you need to move into aged care, there should be sufficient equity to cover the accommodation deposit or daily fee as required.
Myth six: It’s better to get equity from your home by downsizing
In general, most Australian retirees are reluctant to downsize, identifying their current home as optimal. As well as the financial costs, moving from the home and community you have grown to love over many years can result in social and emotional costs.
Selling up may also impact your entitlement to the Age Pension.
Myth seven: I already have a mortgage so I can’t get a reverse mortgage
At Household Capital, we regularly refinance mortgages (and reverse mortgages). A traditional bank mortgage has to be repaid each month, which can impact your retirement cashflow. It also carries default risk if you’re unable to meet those repayments. By refinancing with a Household Loan, you can free up your retirement income and don’t run the risk of the bank foreclosing.
If you’d like to see whether you qualify for accelerated access to a $20k Top Up, check out Household Capital’s online calculator. Home Income and other calculators are available here. Alternatively, you can call Household Capital on 1300 622 100.
Applications for credit are subject to eligibility and lending criteria. Fees and charges are payable and terms and conditions apply (available upon request). Household Capital Pty Limited is a credit representative (512757) of Mortgage Direct Pty Limited ACN 075 721 434, Australian Credit Licence 391876.
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.
You may also like
Rethinking home equity and retirement funding
Australians are experiencing a major societal transformation as the baby boomers, around...
March 20, 2019 4 MIN
Household Loans offer lower interest, more flexibility on home equity release
Many older Australians have a big problem. They should be looking forward to a...
November 28, 2019 4 MIN
Home equity release options compared
Just days after it announced a review into Australia’s retirement income system, the...
December 6, 2019 5 MIN