MoneyTalk member Stanley, asks “can a Pensioner get a home loan of around $50,000 to buy a reasonable home if they have already $200,000?”
If you’re already retired and particularly if you receive the Age Pension, then you probably won’t qualify for a standard home loan. These require that the lender has the capacity to repay the loan before retirement.
These allow seniors, usually aged 65 or over, to borrow against the equity in their homes.
Key features of Reverse mortgages
- No repayments. You don’t have to make any interest or principal repayments while you live in your home. The downside is that the amount you owe builds up as interest accumulates.
- Tight restrictions on borrowing amount depending on your age. Around 65 you may be limited to 15% or 20%, rising to 40% to 45% over 85 years of age.
- No income is required to qualify for a reverse mortgage.
- The loan is repaid from the proceeds of the sale of your house when you move into aged care, sell the house, or die.
- You can’t end up owing the lender more than your home is worth (by law for all reverse mortgages entered into after 18 September 2012).
- The loan can be drawn down in various ways; as a lump sum, as a regular income stream, or as needed (as a line of credit).
But there are some things you need to be aware of.
Most importantly. Because you aren’t making repayments, your debt will mount up at an increasing pace over time as the power of compound interest works against you.
For example. Assume that you are debt free at age 65, then you borrow 20% of your home’s value under a reverse mortgage. By the age of 95 you may have zero equity left in your home — nothing left to use as a deposit for an aged care facility — nothing left to pass on to the children.
So, if you have dependents, talk to them before you do anything.
Use Moneysmart’s reverse mortgage calculator to see how this could work in your case.
Other things to be aware of…
- If you borrow a lump sum and invest it in an assessable asset (like a car, or shares, or a holiday house) you could lose some, or all, of your age pension.
- If you are the sole owner of the property and someone lives with you, then (in some circumstances) that person may not be able to stay when you die. If you want to protect the rights of the other (non-title-holding) resident, make sure you discuss this with your lender before taking out a reverse mortgage.
- If you fix your interest rate then the costs to break your reverse mortgage can be very high.
If you are contemplating a reverse mortgage, make sure you get independent financial advice.
Money For Nothing?
Some companies may offer you an income stream — not for part of the existing value of your home — but in return only for its capital appreciation.
This may sound very attractive. (Almost too good to be true?)
These agreements, called property options, are generally valued very conservatively though. The income you receive will probably be much lower than the capital appreciation of your home which you are giving up.
What are your thoughts?
Are you tempted by the idea of a reverse mortgage? Is there anything else you’d like to know about borrowing as a senior?
Join the conversation — leave a comment below and let us know what you’re thoughts are.