If you’re aged 60 or over and own your home, releasing equity from your property could be an option worth considering, especially if you need additional financial support for retirement. Reverse mortgages have become a popular way for homeowners to unlock the value tied up in their properties without the need to sell or move. While reverse mortgages can provide financial relief, it is essential to understand the risks and long-term consequences associated with them. Before proceeding, it’s advisable to consult with independent financial or legal professionals to ensure you make an informed decision that suits your needs and financial goals.
What is Home Equity Release?
The concept of home equity release refers to accessing the value of your home by using its equity, which is calculated by subtracting any mortgage balance from the home’s current market value. Home equity release allows you to unlock some of this value while continuing to live in the property. This can be useful for various reasons, such as funding home renovations, covering medical bills, or supporting general living expenses.
Ways to access home equity include:
- Reverse mortgage
- Home sale proceeds sharing (home reversion)
- Equity release agreement
- Government’s Home Equity Access Scheme (formerly the Pension Loans Scheme)
The amount of equity you can access depends on several factors, such as:
- Your age
- The value of your home
- The specific type of equity release you choose
Given the impact on your finances, it’s important to consider how equity release might affect your partner, family, or anyone else living with you. Always take time to discuss your options with a financial expert, get independent advice, and ensure you fully understand the terms and conditions before moving forward.
Considerations Before Using Home Equity Release
Before deciding to apply for a reverse mortgage or any other form of home equity release, you need to carefully evaluate how it will affect your overall financial situation:
- Eligibility for the Age Pension: Ensure that the equity release won’t impact your ability to receive the Age Pension or other government benefits.
- Aged Care Costs: Assess how your decision might influence your ability to pay for future aged care services.
- Future Living Expenses: Consider whether you’ll still have enough funds to cover medical bills, home maintenance, and other costs down the line.
- Inheritance and Estate Planning: Think about what you will be able to leave behind for your loved ones after your passing.
- Impact on Household Residents: If someone lives with you, will they be able to stay in the home if you move out or pass away?
Additionally, if you are borrowing to invest, be aware that it puts your entire home at risk, not just the portion you are investing.
Independent Advice is Essential
When considering home equity release options, seek advice from a financial adviser or legal professional who is independent and qualified to help you navigate the process. Services Australia’s Financial Information Service can also offer guidance on how equity release will impact your pension and government benefits.
Reverse Mortgages in Detail
A reverse mortgage is a popular way to access the equity in your home, using the value of your property as security for the loan. This option is specifically designed for people aged 60 and older. One of the key advantages of a reverse mortgage is that it doesn’t require regular repayments, allowing you to preserve your income for other essential needs.
How a Reverse Mortgage Works
A reverse mortgage enables you to borrow money against the equity of your home, with the loan secured by the property itself. There are several ways you can choose to access the loan:
- Regular income stream
- Line of credit
- Lump sum
- Combination of the above
Interest on the loan is charged over time, and it compounds, which means that the amount you owe will gradually increase as the interest adds up. Unlike a traditional mortgage, you don’t need to make regular repayments while living in the home. Instead, the loan is repaid when:
- You sell the home
- You move out of the property
- Your estate sells the property after your death
Additionally, you may have the option to make voluntary repayments or protect a portion of your home’s equity to ensure that you have enough funds for future needs like aged care.
Costs of a Reverse Mortgage
The cost of a reverse mortgage will depend on several factors:
- The amount you borrow
- The way you take the money (e.g., lump sum vs. income stream)
- The interest rate and associated fees (such as loan establishment fees, ongoing costs, and property valuations)
- The duration of the loan
Over time, your debt will grow, and your equity will decrease. To better understand how the reverse mortgage will impact your home equity, lenders are required to provide you with projections that show the effect on your property’s value over time.
Negative Equity Protection
Since September 18, 2012, reverse mortgages are required to include negative equity protection, ensuring that you won’t end up owing more than the value of your home. However, if you took out a reverse mortgage before this date, check the terms of your agreement to confirm whether it includes negative equity protection. If not, it is advisable to contact your lender or seek independent legal advice to understand your options.
Home Sale Proceeds Sharing [ Home Reversion ]
In addition to reverse mortgages, another option for accessing home equity is through home sale proceeds sharing, also known as home reversion. This arrangement allows you to sell a portion of your home’s future value while continuing to live there. In exchange, you receive a lump sum payment, and you retain the remaining share of your home equity.
How Home Sale Proceeds Sharing Works
The amount you receive for selling a portion of your home depends on your age. The older you are, the more favorable the terms will generally be. For example, if your home is worth $500,000 and you sell a 20% share, you might receive anywhere from $37,000 to $78,000 depending on your age and the provider’s offer. When you sell the home in the future, the provider receives their share of the sale proceeds, which will be based on the agreed-upon percentage.
Costs of Home Sale Proceeds Sharing
Unlike a loan, home sale proceeds sharing does not involve interest payments. However, you will pay transaction fees, including the cost of property valuations and other property-related transaction costs. Additionally, the provider will receive a percentage of your home’s future sale value. As the value of your home increases, the provider’s share will grow.
Equity Release Agreements
An equity release agreement is another way to access your home equity. In this arrangement, you sell a portion of your property’s value and receive lump sum payments or installments in return. Over time, your share of equity in the property decreases, and you pay fees that are deducted from your home’s equity.
Government’s Home Equity Access Scheme
The Home Equity Access Scheme (formerly the Pension Loans Scheme) provides eligible Australians with a government-backed loan that allows them to access additional funds to supplement their retirement income. The loan is secured against your property, and you can choose the amount of money you want to receive.
How the Home Equity Access Scheme Works
The loan is paid out as fortnightly payments, and it is designed to supplement your pension. However, the total combined pension and loan payments cannot exceed 1.5 times the maximum fortnightly pension rate. You also have the option to receive a lump sum advance payment, which will reduce the fortnightly payments for the following year.
The loan is subject to a maximum borrowing limit based on your age and the value of your home. There is a negative equity guarantee, meaning you won’t owe more than your home is worth when you repay the loan.
Considering Other Options
Before choosing a reverse mortgage or other home equity release options, it’s important to consider alternative financial solutions:
- Government Benefits: Check if you’re eligible for the Age Pension or other government benefits.
- Downsizing: Selling your home and buying a smaller property could be an option, but consider the costs and how it might affect your government benefits.
- No Interest Loans: Some services offer no-interest loans for essential goods or car repairs, which can be a quicker and cheaper alternative.
Call us for a Discussion
Reverse mortgages offer a way for older Australians to unlock the equity in their homes and improve their retirement income. However, like any financial decision, it’s crucial to weigh the pros and cons, understand the long-term implications, and seek independent advice. Whether you choose a reverse mortgage, home sale proceeds sharing, or the Home Equity Access Scheme, be sure to understand your options and their potential effects on your finances and future lifestyle.
Call us for a discussion.
