What Is a Reverse Mortgage, and Are They Available to Expats?
Do you want to earn money from your home? Releasing the equity from your residential or investment property might seem too good to be true. However, if you need some extra cash towards the end of your life, a reverse mortgage might answer your problems.
What Is a Reverse Mortgage?
Essentially, a reverse mortgage is a loan. If you’re over 60 years old and have considerable home equity on your Australian property, you can borrow against the value of your home. The bank may give the funds a lump sum, fixed monthly payment or a line of credit.
It’s the exact opposite of a regular mortgage. Instead of making home loan repayments each month, you will receive payments from the bank. You must repay the reverse mortgage when the borrower (you) dies, move out permanently, or sell the home. If you pass away, your dependents (or whoever inherits the house and is responsible for your estate) must organise the loan repayment. This might mean selling the property.
If the borrower lives longer than expected or the property value drops, the borrower’s estate is not responsible for paying the difference.
Get a free Australian mortgage assessment today.
How Reverse Mortgages Work
‘Equity’ means the property’s value, minus any money you owe – e.g., your outstanding loan balance. Essentially, it’s the proportion of the property you own.
When you first take out a home loan with a 20% deposit, you will have 20% equity. After several years of paying your home loan repayments, you should have more equity. If you completely pay off your mortgage after the loan term or pay it early, you will have 100% equity.
‘Home equity release’ is when you release some of your equity while living or renting out the property. For instance, if you want money for renovations, medical expenses, or to help with your living costs, you might want to release the equity from your Australian property with a reverse mortgage.
Other ways you can access equity:
- Home sale proceeds sharing
- Equity release agreement
- The Government’s Pension Loans Scheme
The amount of money you can release from your property’s equity depends on:
- Your age
- The property value
- The type of equity release
- The lender
Before applying for a reverse mortgage or other equity releases, ensure you understand how a reverse mortgage works and its impact on your family and dependents. A reverse mortgage could help your retirement income, but it could also leave a significant financial debt for your family.
What Are the Pros of a Reverse Mortgage?
While reverse mortgages aren’t for everyone, they do have some benefits.
- Manage your retirement income: Many seniors face a significant reduction in income when they retire, especially if they plan to move overseas to enjoy retirement. A reverse mortgage will supplement income and help to pay the bills.
- You don’t have to move: If you find your current property is too expensive to maintain, releasing equity will help you cover the costs rather than moving to a more affordable house and neighbourhood.
- Tax-free income: Unlike rental income, home equity loan payments or lump sum is tax-free.
- Protection: You’re protected if the property market plunges and your property value drops. Your reverse mortgage won’t require you or your estate to cover the difference between the loan amount and property value.
What Are the Drawbacks of a Reverse Mortgage?
- You have to pay for it: While it may seem like ‘free money’, you will have to pay the loan and its accumulated interest back at some point. If you die before you repay the loan, your estate will pay it.
- Cannot deduct interest from tax: While you can deduct interest repayments from your taxable income on your mortgage, you cannot deduct interest on a reverse mortgage.
- Circumstances may be beyond your control: For instance, if you move into a care home, your property is no longer a primary residence, and you might have to begin repaying.
Types of Reverse Mortgages
There are different types of reverse mortgages: home equity conversion mortgages (HECM), single-purpose reverse mortgages, and proprietary reverse mortgages. Most lenders offer home equity conversion mortgages – it’s the most common type. When you apply for a reverse home loan, you can receive the funds in several ways:
- Lump-sum: Get all the proceeds in one go when your loan closes. It usually has a fixed interest rate.
- Equal monthly payments: Also known as an annuity or tenure plan, the borrower will receive steady payments for as long as they live in the home.
- Term payments: The lender will give the borrower equal monthly payments for a set period, such as ten years.
- Line of credit: The borrower only pays interest on the money they actually borrow from the credit line.
- Equal monthly repayments plus a line of credit: The borrower receives monthly payments for as long as they use the home as their principal residence. If they need more money, they can access a line of credit.
Get a free Australian mortgage assessment today.
What Is Required for a Reverse Mortgage?
To apply for a reverse mortgage, you need:
- A property of any type, including a townhouse, apartment, or bungalow. You must own the property.
- To be at least 60 years old and have substantial equity on your home.
There are no income or credit score requirements, but there are still rules about who is eligible to apply. Check with your lender or mortgage broker to find out whether you qualify.
How Much Does a Reverse Mortgage Cost?
Unlike normal mortgages, you don’t have to pay a reverse mortgage back until you move out of the house or pass away. Therefore, costs are pretty minimal. If the home goes down in value when you try to sell to repay the reverse loan, you don’t have to pay the difference. As a result, many lenders ask borrowers to pay insurance premiums not to lose money.
Insurance premiums are usually around 0.5 – 2.5% of the property value to pay upfront. Then, the lender might also ask borrowers to pay an ongoing fee throughout the reverse mortgage lifetime.
If you’re worried about the cost of repaying the reverse mortgage when you move out or if you pass away, it’s typically covered by the cost of the house when you sell. Of course, this often means you have nothing to pass on to your heirs. There are other options your descendants can choose to repay the loan. However, consider whether losing your property is worth the reverse loan.
How Much Money Will the Lender Offer With a Reverse Mortgage?
The sum of money you’re allowed to borrow depends on your reverse mortgage terms and payment plan. Some reverse mortgages base the amount you can borrow on the youngest borrower’s age, the home loan interest rate, and your home’s value. Unfortunately, you can’t borrow 100% of your home value.
Moreover, you cannot borrow the total amount within the first year if you choose a lump sum or line of credit. Instead, you can borrow up to 60% within the first year.
Reverse Mortgage Interest Rates
As with any loan, you have to pay interest on the amount you borrow. Only the lump sum reverse mortgage has a fixed interest rate. The other options have variable interest rates, meaning that the amount of interest you pay adjusts according to the market. As the reverse loan takes place over many years, a variable rate loan makes sense.
When Do I Have to Pay Back A Reverse Home Loan?
Each lender’s repayment requirements are different. Generally speaking, you will need to repay most reverse mortgages when the following applies:
- You sell the home
- You live outside the home for more than a year (unless it’s an investment reverse mortgage)
- You pass away
- You fail to maintain the property
- You stop paying your homeowners’ insurance or property taxes
Check with your lender to discover when you need to pay your reverse mortgage.
Get a free Australian mortgage assessment today.
Can You Owe the Lender More Than the Property's Worth With a Reverse Mortgage?
If you have equal monthly repayments on your home for the rest of your life, the loan balance could grow bigger than the home’s value. However, lenders cannot demand the borrower or their heirs pay the extra if the house is underwater when the loan is due. Instead, the lender gets their money back through the mortgage insurance premiums.
Can Expats Apply for a Reverse Mortgage Loan?
Generally speaking, any Australian citizen or permanent resident can apply for a reverse mortgage loan in Australia, even if living overseas. The process is the same as for a normal home loan – except you already have the equity on your home, and you won’t need a deposit.
However, the exact lending criteria differ between lenders. Some lenders only offer reverse mortgage loans to those with primary residential homes in Australia. If your Aussie home is an investment property, you may need to speak to a mortgage broker about your reverse home loan options.
Additionally, some lenders don’t accept all foreign currencies. If you plan to repay your reverse mortgage loan with a foreign currency, you may need to shop around for a lender who will accept your foreign currency. At Odin Mortgage, we specialise in foreign buyers and expat mortgages. Speak to us today to find out your reverse mortgage options.
Reverse mortgages are excellent ways to get a little extra cash in your old age. However, they also come with the risk of losing your family home when you move out or pass away. Consider the financial responsibility you have to your heirs and discuss the ramifications of a reverse mortgage before applying.
As an expat, you can apply for a reverse mortgage if you’re moving back to Australia or talk to your mortgage broker about reverse mortgages on investment properties.
Frequently Asked Questions
What Is the Downside of Getting a Reverse Mortgage?
A reverse mortgage usually has higher fees than most traditional home loans, including expensive insurance premiums. Plus, when the loan ends, you must repay it – usually by selling the house. To ensure the loan doesn’t end, borrowers must stay on top of property taxes, insurance, and maintenance costs.
However, if you’re aware of the costs and wish to earn extra money later in life, speak to a mortgage broker today about your options.
What Is the Point of a Reverse Mortgage?
A reverse mortgage is a type of loan that allows anyone over 60 to convert their home equity into cash. By releasing the equity on your home (the amount of the property you actually own), you can enjoy extra cash.
You only need to repay the mortgage when you move out of the property, sell it, or pass away. Usually, your heirs can repay the loan with the proceeds from the property sale.
How Much Money Can You Receive From a Reverse Mortgage?
The amount of money you receive depends on the value of your property, your age (or the age of the youngest borrower), and the amount of equity you have on your property. Typically, you can only borrow up to 80% of the home equity amount and only 60% of it as a lump sum within the first year of the loan.
The older you are and the greater the value of your property, the more money you can receive from a reverse mortgage.
What Happens at the End of a Reverse Mortgage?
Reverse mortgages end when you move out of the home, pass away, sell it, or fail to maintain the property, your taxes, and insurance payments. When the loan ends, you must repay it with interest. Generally speaking, the sale proceeds from the property cover the cost of the loan.
If the loan balance outweighs the house value, you won’t have to pay the difference. Your insurance premiums cover your heirs from paying extra money towards your loan after you die.
Can You Lose Your Home With a Reverse Mortgage?
If you don’t uphold the terms of the agreement (e.g. you fail to pay your property taxes, homeowners insurance, or maintain the property) or if you move out, then yes, you could lose your house. When the loan comes to term, you must repay it.
Therefore, if you cannot afford the loan repayments, you will need to sell the house to cover the cost. Ensure your heirs understand their role.