Reverse mortgages and other equity release products
Reverse mortgages and other equity release products let you use the equity in your home while you still live in it. In Australia you might be offered either:
- a reverse mortgage (this is the most common), or
- a home reversion scheme (available in some areas).
These products have some common features:
- They are generally only available if you are aged 60 or over.
- You can qualify for equity release without an income.
- You don’t need to repay any money while you live in your home.
About home equity
Equity is the part of your home that you own outright. If you have no mortgage on your home, you own 100% of the equity. In other words, if you sold your home, all the money from the sale would go to you. The image below shows how your equity increases over time with an ordinary mortgage.
Your equity in an ordinary mortgage:
Reverse mortgages
These products allow you to borrow money against the value of your home. You usually don't have to repay the loan until you leave and move into care, sell your home, or die. Instead your debt and interest (and any fees and charges you don't pay up front) build up (or compound) over time. When the loan ends you, or your estate, must repay what's owing (usually out of the proceeds of the sale of your home).
The image below shows how your equity decreases with a reverse mortgage:
More about reverse mortgages
Home reversion schemes
These products allow you to sell all or part of your home at a discounted price – usually between 35% and 50% of what your home is worth. But you have the right to keep living in your home until you die or decide you want to move.
The image below shows how a home reversion scheme works:
More about home reversion schemes
Other equity release products
Pension Loans Scheme
Centrelink and the Department of Veterans’ Affairs offer another way to release equity in your home (or other real estate assets) through the Pension Loans Scheme.
You (or your partner) might be eligible if at least one of you is of Age Pension age and:
- you only receive a part Age Pension, or
- you cannot get an Age Pension because your income or assets (but not both) are over the relevant limits.
The Pension Loans Scheme lets you use your property as security for a loan. The loan amount is limited to ensure that you cannot end up with negative equity in your property.
More about the Pension Loans Scheme
Shared appreciation mortgages
Shared appreciation mortgages (or SAMs) are only available to people younger than 55. SAMs allow you to pay reduced or no interest on a loan, in return for giving up a share of the capital gain in your home.
The risks of equity release
Equity release products can give you benefits, but they also have significant risks:
- They can be difficult to understand.
- They can be relatively expensive compared to other types of loans with regular repayments.
- If you breach certain terms and conditions you may have to sell your home and repay the loan.
- If property values don’t increase as much as you think, or if they fall, you might end up with less money than you expect when you sell your home.
Your circumstances and financial views might change as you age —if you release too much money now you may find you do not have enough later on.
Is equity release right for you?
Using the equity in your home is a big step. It involves what is probably your most valuable asset—your home.
This checklist will help you think about what your needs are now and in the future so that you can check whether an equity release product will be right for you.
Checklist
What are your financial needs now and what will they be in the future?
Consider your possible future financial needs as well as your immediate financial needs (eg everyday living expenses, health care costs, a car, a holiday). Think about:
- how much cash you need now
- how much the loan is likely to cost you over the long term
- how long you are likely to live for
- whether you will have enough cash left over for aged care accommodation if you need it; and
- whether you want to leave anything to your kids.
What are your other options?
Pick the strategy that best suits your needs. Some other options to think about are:
- selling your home and moving somewhere smaller; or
- living off your current income and getting an equity release product further down the track (to preserve your nest egg).
- If you choose an equity release option, make sure you shop around and find the one that best suits your needs.
Do you have a dependent partner, spouse or child?
Do you want them to live in the home after you die? Check if this will be possible if you get an equity release product.
What about your pensions and benefits?
Your pension may be affected if you use an equity release product to receive large lump sums, buy some kinds of assets or give larger amounts of cash to your children.
Talk to Centrelink Financial Information Service or the Department of Veterans' Affairs for more information.
Do you need a lump sum and/or a regular stream of income?
It’s likely to be cheaper in the long run if you take the loan as a regular stream of income because the money is released gradually and you only pay interest on what you've borrowed.
For more information on whether equity release is right for you download your free copy of ASIC's guide "Thinking of using the equity in your home?"  or call ASIC's infoline on 1300 300 630. |
Warnings
Some people have used money from equity release products for unwise or highly risky purposes. Putting your equity release money in the bank could cost you dearly since you're most unlikely to get a return as high as the cost of your loan.
Using the money to make other investments is a highly risky way to borrow. Your debt will keep growing, and there's no guarantee your investment will turn out well. You should also think twice about taking the maximum amount, especially if you are a younger retiree because you may not have enough cash left to meet your needs as you age.
Get more information and advice
How can you tell the difference between a good sales pitch and straight information or advice? Go to an independent source. You should not rely solely on advice from anyone who is trying to sell you an equity release product, because that person might not have your best interests at heart.
- Make sure you get a lawyer to read the terms and conditions and explain exactly what you're signing up for.
- Always check how that you are getting financial advice from a licensed financial adviser. Check how they are being paid for the advice they give you. See Getting advice for more information.
- If you are using a mortgage broker, look for one who has received industry accreditation.
- Consult the Centrelink Financial Information Service or the Department of Veterans' Affairs to see if it may impact on your pension entitlements. The National Information Centre on Retirement Investments (NICRI) provides a free telephone information service called ERRMIS, Equity Release/Reverse Mortgage Information Service .
- Talk it over with your family.
In Australia advice about loans is fairly loosely regulated so be fussy about the people who advise you. People advising just about loans, for example mortgage brokers, don't have to be licensed. However, the law can still protect you against misleading, deceptive and unconscionable conduct.
Reverse mortgage calculators
FIDO's reverse mortgage calculator shows you the effect of decisions you make about how much you borrow, how long you borrow for, and interest rates and various fees. The calculator is not suitable for other equity release schemes like home reversion schemes and SAMs.
You should be cautious about calculators provided by equity release providers. Some of these calculators will only show how much you can borrow and not how much you have to repay.
How to complain
ASIC is working closely with industry, including the Seniors Australian Equity Release Association of Lenders (or SEQUAL) to promote best practice and reduce the risks for consumers and will monitor the marketplace closely to identify misleading, deceptive or unconscionable conduct in the sales of these products. Please let ASIC know if you feel you have been mislead or deceived.
Useful links
More about reverse mortgages
FIDO Website: Printed 02/10/2010
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