What to know about reverse mortgages

Posted on 6 February '20 by , under money.

A financial dilemma that is becoming increasingly common is finding a way to fund a comfortable retirement lifestyle without having to sell the family home. One solution to this is a reverse mortgage; a loan that allows homeowners to convert part of the equity in their home into cash.

Money from a reverse mortgage can then be received as a regular income stream, line of credit, lump sum, or a combination of these options. No income is required to qualify for a reverse mortgage, which makes them ideal for those who have retired from the workforce.

Given the nature of this type of loan, it is important that homeowners understand the risks involved and consider how they can protect themselves as much as possible. Risks associated with reverse mortgages include:

  • The interest rates are usually higher than average home loans.
  • Variable interest rates mean that there will be changes to what you are charged over time. Debt can rise quickly since the interest compounds over the loan term.
  • The loan can affect your pension eligibility.
  • Drawing funds from your property can reduce what you could potentially access later on, leaving little left for aged care or other future needs.
  • For those who fix their interest, the costs to break the agreement can be very high.
  • If you are the sole owner of the property and someone lives with you, that person may not be able to stay when you die (in some circumstances).