REVERSE MORTGAGES
Reverse mortgages allow you to borrow cash against the value of your home. You usually
don’t have to make regular repayments until you leave and move into an aged care
facility, sell your home or die. When the loan ends you, or your estate, must repay
what's owing, usually out of the proceeds of the sale of your home.
Each year the fees and interest you would ordinarily pay are added to the loan balance.
Over time, you're charged interest on the interest (or compound interest) and that
builds up the total amount you owe.
There is a risk that the amount of the loan may increase to a point where it is
more than the value of your home. This is called 'negative equity'. Some, but not
all, reverse mortgage products guarantee that if this happens, you will not have
to repay more than the value of your home (a no negative equity guarantee). But
you may lose this protection if you don't meet the terms and conditions of the loan
– for example, if you don't repair and maintain your home to a standard set by the
lender.
You should be eligible for a reverse mortgage if you are 60 years or older and own
your own home. You'll usually be able to borrow between 15% and 40% of the value
of your home, depending on how old you are – the older you are the more you can
borrow. In the case of couples who are both owners of the property, the amount you
can borrow is based on the age of the youngest borrower.
What are the benefits?
- You can access cash as a lump sum, a regular stream of income or a combination of both – to suit your needs.
- You don't need a current income to qualify.
- You get to stay in your home and keep ownership.
- You usually don't have to make any regular repayments while you live in your home.
What are the costs?
- Interest rates are usually higher than average home loan rates. /li>
- Because the interest builds up (or compounds) over the term of the loan, the debt can rise quickly, to the point where it may even be more than the value of your home.
- You may have obligations that become quite onerous, especially as you get older – like maintaining the property to a standard required by the lender. If you don't meet these obligations, you may lose your no negative equity guarantee and the lender may be entitled to evict you.
- If you are the sole owner of your home and you move or die, anyone who lives with you may not be able to stay in the home with you.
- The loan may affect your eligibility for a pension.
- There is no way to know for certain how much you will owe at the end of the loan.
- You might not have enough money left over after the loan to pay for aged care accommodation or to leave an inheritance (although some products do allow you to protect a fixed percentage of the value of the property so it cannot be used to repay the debt).
Warnings
- If you take up a reverse mortgage with a fixed term you may have to sell the house and repay the loan in your lifetime.
- If you take up a product that does not contain a no negative equity guarantee, you may have to meet the shortfall if your debt amounts to more than the value of your property.
EQUITY FINANCE MORTGAGES
An Equity Finance Mortgage (EFM) is a new type of home loan that effectively boosts
your potential borrowing capacity by anything up to 25%. It has been launched in
Sydney, Melbourne and Brisbane.
How does it work?
An Equity Finance Mortgage can work in conjunction with a traditional home loan,
or without a traditional mortgage if you own your home. An EFM can let you move
some of the expense of a traditional home loan to later when you sell your property.
The equity finance portion, which can be up to 20 per cent of the purchase value
of a new home is funded by an "equity finance mortgage" on which you pay ZERO interest.
The equity finance lender trades off that interest for up to 40 per cent of any
future capital gains or 20 per cent of any capital losses on the property, as a
substitute for a traditional interest rate.
In summary:
- An Equity Finance Mortgage allows you to borrow up to 20% of a property's value
- There is no annual percentage rate applicable to an EFM loan, unless you are in default
- You are not required to make any regular monthly interest repayments throughout the EFM loan, which you can hold for 25 years
- When you sell the property or repay the EFM for some other reason, you repay the EFM amount you originally borrowed plus up to a 40% share of any increase in the value of the property
Who would an Equity Finance Mortgage suit?
An Equity Finance Mortgage has broad owner-occupier utilisation potential - for First Home Buyers and Upgraders - virtually anyone who wants to leverage more than their current buying power. Here are some examples:
- Reduce the upfront and ongoing costs of purchasing a new property
- Reduce your current monthly mortgage repayments (via a refinancing of your existing loan)
- Buy a more expensive property than you may otherwise be able to afford.
- Retirees, as it allows you to stay in your home and access some of the equity in your property.
This article contains general information only and is not provided as legal advice. Professional advice, including financial advice, should be taken before any course of action is pursued, or any information here is relied upon.
For advice about Equity Finance Mortgages contact Caroline Symington on 9890 3321.
Our areas of expertise of Commercial Law including: