The Pros and Cons of a Reverse Mortgage

June 15th 2023 | Categories: Retirement | Financial Planning | Home Loans & Leveraging Equity |

Amidst these economic times, it is not surprising that reverse mortgages are gaining more attention through various media platforms – tv, radio and even across the internet. Whilst reverse mortgages may offer certain advantages, if you are considering a reverse mortgage in Australia then it is crucial that you consider both the benefits and drawbacks of such a unique financial product. In this article, we delve into the pros and cons of a reverse mortgage in Australia, with the hope that we will be able to empower you to make an informed choice so that, through all stages of your life, you can live your best possible life.

What is a reverse mortgage?

In Australia, a reverse mortgage is a financial product designed for homeowners who are generally aged 60 and above. It allows eligible people to convert a portion of their home equity into a loan, thus providing them with access to funds without the need to sell their property. Unlike traditional mortgages, reverse mortgages do not require monthly repayments. Instead, the loan, along with accumulated interest, is typically repaid when the homeowner sells the property, moves into aged care, or passes away. This enables retirees to tap into their home’s value and utilise the funds from their home for their current needs.

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Why do people get a reverse mortgage?

Some of the reasons you may look to get a reverse mortgage include the ability to access equity in your home without the need to sell your house, to supplement your retirement income, to help cover unexpected expenses that pop up, to help support your healthcare or that of a family member or to fulfil lifelong aspirations which you otherwise may not have been able to achieve.

What are the pros and cons of a Reverse Mortgage?

There are many different reasons for and against a reverse mortgage. Before we get started, we strongly encourage anyone considering taking a reverse mortgage to speak to a financial adviser to ensure that they are aware of the full extent that a reverse mortgage may affect their life in the future, such as your home, family legacy and inheritances as well as estate planning to ensure that a reverse mortgage is the best option for you and your family.

Pros of a reverse mortgage:

A reverse mortgage may be a valuable financial tool for homeowners seeking additional flexibility or stability in their retirement years. Some of the advantages of a reverse mortgage may include: 1. Enhanced Financial Flexibility – Reverse mortgages may provide a retiree with increased financial flexibility by allowing them to tap into their home equity. A reverse mortgage may allow you access to a source of funds to supplement your retirement income, unexpected expenses related to healthcare or lifestyle choices. This newfound financial freedom may allow a retiree to maintain a comfortable lifestyle without the need to sell their beloved home. 2. No Timed Repayment Obligation – One of the notable advantages of reverse mortgages is that borrowers are not always required to make monthly repayments. In some cases, the loan, along with accumulated interest, will be typically repaid when the homeowner sells the property, transitions to aged care, or passes away.This feature alleviates financial pressure on people who may have limited income and allows them to enjoy their retirement years without worrying about mortgage repayments. 3. Regulation by Government Bodies – Reverse mortgages in Australia are regulated by government bodies, such as the Australian Securities and Investments Commission (ASIC) and the Australian Prudential Regulation Authority (APRA). These regulatory measures ensure that borrowers are protected, and lenders adhere to responsible lending practices. Consequently, homeowners can generally feel secure in their decision to utilize a reverse mortgage, knowing that they are safeguarded by the regulatory framework.

Cons of a Reverse Mortgage

While reverse mortgages can offer some advantages in the right context, it is very important to also consider the drawbacks of a reverse mortgage as these considerations may significantly impact your financial situation, your long-term financial plans or your financial legacy to family and loved ones. Some of the negatives of a reverse mortgage may include: 1. Fast Accumulating Debt with Interest Rate Rises One of the major drawbacks of a reverse mortgage is the accumulation of debt over time. This type of debt builds fast, particularly in the turbulent economic landscape that we are currently faced with as interest rate rises continue. Reverse mortgage contracts can also have hidden costs such as fees and interest that can eat up your home equity in double the amount of time that it would take in comparison to a normal mortgage. As interest accrues on the reverse mortgage loan, the outstanding balance can increase significantly, reducing the equity left in the property to zero. For this reason, it is essential for borrowers to carefully consider their financial circumstances and discuss their future plans with their Financial Adviser to ensure that the loan’s compounding interest does not erode their home equity excessively. 2. Impact on Inheritance The impact of a reverse mortgage on your family’s inheritance should not be taken lightly. A reverse mortgage may have a significant impact on any financial legacy that you plan to leave for your family and/or loved ones and this can cause devastating effects on your ability to transfer generational wealth to your family and loved ones. As the reverse mortgage loan is repaid through the sale of your property, there will likely be far less equity remaining to pass down to your heirs, if any equity at all. For this reason, it is important that you have open discussions with your family members and take into careful consideration the long-term implications of such a financial decision on your future estate planning. You should always speak with a financial adviser to understand how your family’s inheritance or your inheritance plans may be affected by the decision to take out a reverse mortgage. 3. Changing Personal Circumstances While reverse mortgages offer financial flexibility, a borrower taking out a reverse mortgage should be mindful of potential changes that they may have in their personal circumstances. As we are all aware, life can be unpredictable and factors such as health issues or the need for long-term aged care may arise significantly changing your future in the second half of your life. In such cases, you may need to sell your property sooner than you expected, potentially affecting your financial plans and your overall stability.

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The bottom line:

Whilst reverse mortgages can be a viable financial solution to help you unlock the value of your home equity, it is important to consider the significant downsides of such a decision, such as the accumulation of debt, rising interest rates, the impact that a reverse mortgage will have on your family’s inheritance as well as your changing personal circumstances and how these may affect both you and your family’s future. For this reason, we strongly encourage anyone considering taking a reverse mortgage in Australia to speak to a financial adviser to ensure any decision you make will allow you to live your best possible life both now and in the future. Not only can a Financial Adviser assist you with a thorough assessment of your personal, financial circumstances but a financial adviser can also help you to facilitate an open discussion with your loved ones so that you can make an informed decision that will ensure your current financial decisions align with your long-term personal financial goals and future aspirations for both yourself and your wider family.

Thinking about a reverse mortgage? Speak with one of our Financial Advisers to ensure you continue to live your best possible life.

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What you need to knowThis information is provided by Invest Blue Pty Ltd. (ABN 91 100 874 744). The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice regarding those matters and seek personal financial, tax and/or legal advice before acting on this information. Read our Financial Services Guide for information about our services, including the fees and other benefits that AMP companies and their representatives may receive in relation to products and services provided to you.