Reverse mortgages
- Thread starter Hodge
- Start date
They were out of fashion for a while, but seem to be coming back.
I have a quick look at the Mac Bank one the otherday.
They will basically lend someone up to 40% of the value of their property. The borrower can use this money for whatever and not pay interest - it is capitalised. Eventually the home is sold and the lender gets its money.
MB have a no negative equity guarantee. The bank is banking on capital growth and death or sale after not too many years.
There are various LVRs depending on age so it would be very unlikely that a loan would go for 30 years. I am not sure what the starting age is but generally 65+ I think. I don't think there is a fixed term, but whenever the person leaves the home, sells it or dies and then the loan is repaid.
I have never written one of these loans either.
https://www.moneysmart.gov.au/super...ome-sources-in-retirement/home-equity-release
I have never written one of these loans either.
https://www.moneysmart.gov.au/super...ome-sources-in-retirement/home-equity-release
Bendigo Bank are big in this area and claim to offer a product that isn't a loan as such. Its a deferred sale with the bank sharing in the equity change.
http://www.bendigobank.com.au/news-...mesafe-a-new-solution-to-the-aged-cash-crisis
http://www.bendigobank.com.au/news-...mesafe-a-new-solution-to-the-aged-cash-crisis
Gee, the banks do alright on these arrangements!
Particularly the home reversion schemes - the discount they apply is huge!!
Generally speaking, reverse mortgages allow people in retirement with little or no income to access their equity for a variety of reasons.
The loan doesn't need to be repaid until the borrower moves out of the property. This is usually triggered under the following conditions:
1. They move into a nursing home.
2. They sell the property.
3. They die.
At this point the property is either sold or the estate can pay off the loan.
Interest is capitalized until the loan is repaid. Lenders must offer a guarantee that the borrower cannot be in a negative equity position. In other words, the lender will take the loss if the property is worth less than the amount outstanding.
The amount for which the borrower is eligible is LVR and aged based. The older they are the more they can borrower. This is designed to ensure the lender never gets into that negative equity situation.
Depending on what the person will do with the money, the lender may require the borrower to get financial advice.
These loans can work well to give the borrower access to additional funds in retirement and there are some fairly reasonable protections in place.
Personally though, as a broker I feel these types of loans are a business risk. Despite the best of intentions and even the best possible advice, there's a significant risk that 10-20 years down the track you'll have the borrowers kids coming after you because they're not going to inherit the parents house. It's fairly easy to defend if you keep good records and give good advice, but it still takes time and money to defend.
The loan doesn't need to be repaid until the borrower moves out of the property. This is usually triggered under the following conditions:
1. They move into a nursing home.
2. They sell the property.
3. They die.
At this point the property is either sold or the estate can pay off the loan.
Interest is capitalized until the loan is repaid. Lenders must offer a guarantee that the borrower cannot be in a negative equity position. In other words, the lender will take the loss if the property is worth less than the amount outstanding.
The amount for which the borrower is eligible is LVR and aged based. The older they are the more they can borrower. This is designed to ensure the lender never gets into that negative equity situation.
Depending on what the person will do with the money, the lender may require the borrower to get financial advice.
These loans can work well to give the borrower access to additional funds in retirement and there are some fairly reasonable protections in place.
Personally though, as a broker I feel these types of loans are a business risk. Despite the best of intentions and even the best possible advice, there's a significant risk that 10-20 years down the track you'll have the borrowers kids coming after you because they're not going to inherit the parents house. It's fairly easy to defend if you keep good records and give good advice, but it still takes time and money to defend.
CBA offers these and I've done a reasonable amount of them.
https://www.commbank.com.au/personal/home-loans/reverse-mortgage.html
Age 70-74 Maximum loan $325,000 Max LVR 25%
Age 75-79 Maximum loan $325,000 Max LVR 30%
Age 80-84 Maximum loan $400,000 Max LVR 35%
Age 85+ Maximum loan $425,000 Max LVR 40%
$950 establishment fee
$12 monthly loan service fee
7.05% interest rate
https://www.commbank.com.au/personal/home-loans/reverse-mortgage.html
- Supplement your income without selling your home
- Borrow up to 40 per cent of the value of your property to a maximum of $425,000 depending on your age
- Make no regular repayments as interest, fees and charges accumulate until the loan is repaid (you can also repay the loan sooner)
- Defer repayment until you no longer live in the home
- Avoid leaving debt for your family with no negative equity guarantee
Age 70-74 Maximum loan $325,000 Max LVR 25%
Age 75-79 Maximum loan $325,000 Max LVR 30%
Age 80-84 Maximum loan $400,000 Max LVR 35%
Age 85+ Maximum loan $425,000 Max LVR 40%
- It is mandatory that independant legal advice is obtained and a Statutory Declaration is signed.
- It is highly recommended that independant finance advice is obtained
$950 establishment fee
$12 monthly loan service fee
7.05% interest rate
Not surprised RM's are not mentioned much on this forum, most brokers keep away from them, increasing ASIC requirements, most lenders require SEQUAL membership for brokers, small loan sizes (average around $60k but have done many for smaller amounts) and they take time to make sure the clients understand the possible outcomes, beneficiaries considered etc.
However I have also done RM's for seniors with considerable equity who want to help their kids have a start in the property market, so rather than waiting for death to pass wealth on, they can use a RM.
As others have said, in essence just like a normal mortgage over a property except that no repayments need to be made until a defined event, such as death, sale etc. It is possible that it could be in place for 30 years or longer. Repayments can be made and beneficiaries may consider making these to keep the loan size down. For the CBA product, it is a capitalising LOC essentially, although it is the most expensive and has monthly fees.
Some lenders have a increasing sliding scale of LVR based on age, but not all do, Bankwest for instance has one limit regardless of age at 25% LVR. All lenders require legal advice, some require financial advice also.
The Bendigo branded product is a deferred real estate sale, it is not offered in all areas, very restrictive in post codes and property types as it is based on a share of the final sale price. In a strong property market, it will be far more expensive than a RM will.
Reasons are varied why seniors chose this option, for many it is just to supplement their pension and have a quality of life, some use it for their Bucket List, a visit to the old country one last time while they still can. Others use it for travel, upgrades to their home, replace a car and to assist children. I have not come across a senior whose kids have objected to their parents enjoying a quality of life on retirement, the sentiment loud and clear, 'it is your money, enjoy life'. They may only need $20k or $30k, a RM is an option to consider if the only alternative is to sell and downsize.
The risks are the compounding interest over time but legislation is such that the no negative equity guarantee is that the debt will never be more than the property value itself. Lenders are not in this game to lose money, hence the low LVR's offered generally based on age. With the lack of lender competition, they charge like wounded bulls on establishment fees and higher interest rates, best at the moment is 6.70%.
Hope that helps.
However I have also done RM's for seniors with considerable equity who want to help their kids have a start in the property market, so rather than waiting for death to pass wealth on, they can use a RM.
As others have said, in essence just like a normal mortgage over a property except that no repayments need to be made until a defined event, such as death, sale etc. It is possible that it could be in place for 30 years or longer. Repayments can be made and beneficiaries may consider making these to keep the loan size down. For the CBA product, it is a capitalising LOC essentially, although it is the most expensive and has monthly fees.
Some lenders have a increasing sliding scale of LVR based on age, but not all do, Bankwest for instance has one limit regardless of age at 25% LVR. All lenders require legal advice, some require financial advice also.
The Bendigo branded product is a deferred real estate sale, it is not offered in all areas, very restrictive in post codes and property types as it is based on a share of the final sale price. In a strong property market, it will be far more expensive than a RM will.
Reasons are varied why seniors chose this option, for many it is just to supplement their pension and have a quality of life, some use it for their Bucket List, a visit to the old country one last time while they still can. Others use it for travel, upgrades to their home, replace a car and to assist children. I have not come across a senior whose kids have objected to their parents enjoying a quality of life on retirement, the sentiment loud and clear, 'it is your money, enjoy life'. They may only need $20k or $30k, a RM is an option to consider if the only alternative is to sell and downsize.
The risks are the compounding interest over time but legislation is such that the no negative equity guarantee is that the debt will never be more than the property value itself. Lenders are not in this game to lose money, hence the low LVR's offered generally based on age. With the lack of lender competition, they charge like wounded bulls on establishment fees and higher interest rates, best at the moment is 6.70%.
Hope that helps.
