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Reverse Mortgages: What Are They & The Pitfalls

A Reverse Mortgage is a loan which is accessible by individuals generally over the age of 60, who have equity in their property which they can offer as security to a financier but do not have a regular income, thus are unable to obtain a conventional loan where regular repayments can be made.

The bank will loan a minimal amount, and this will vary depending on the Borrower’s age but the general consensus is the older the Borrower, the higher the borrowing power. The interest rates on a Reverse Mortgage loan is likely to be higher than the norm and because this loan does not require repayments to be made, the principal sum and interest compounds rapidly over a period of time. Thus the longer the loan is held, the greater the growth of the loan amount and accrual of interest, which significantly reduces the equity held in the property.

Borrowers may have the option to have an initial sum released to them, and then have further amounts released upon request, which will be favourable, as the additional amounts will not accrue interest until it has been provided to the Borrowers. Unfortunately though, most banks impose a fee each time a further sum is advanced by the bank. There may also be other hidden costs that Borrowers are not aware of until the loan agreement is reviewed by a lawyer. The bank fees associated with a Reverse Mortgage can also be higher than the norm.

As long as the Borrower/s are not in default of the loan agreement, they can remain in the property for as long as they live. Within 12 months after the Borrower/s passes away or moves out of the mortgaged property, the bank will require the property be sold to recover the outstanding amount owing. This means that should the Borrower have any dependants residing with them, the dependants will be required to vacate the property for the sale. Furthermore, prior to having anyone else reside in the property, whether it be a dependant or perhaps to have the property tenanted, the Borrower will need to seek the bank’s written consent prior to allowing this.

Please note that the income generated from the Reverse Mortgage loan, and the reduced equity in the property may affect a Borrower’s ability to access aged care and eligibility for pension payments due to the lump sum payment which increases your asset balance. Furthermore, a Borrower may not be able to leave the family home to their children, as there may not be any equity remaining in the property by the time it is to be sold. A Borrower should not be reliant on their prediction that equity in the property will increase, as it may not, based on previous property market crashes.

A loan application of this kind should only be applied for as a last resort. It is important to check the terms and conditions to confirm the loan documents provided have a No Negative Equity Guarantee which ensures you will never owe more than the value of the home and the terms surround that, and there is a Protected Equity Option which will allow you to retain a portion of the value of the property once it is sold.

How Can We Help?

We have the legal experience and knowledge to explain the risks contained in your Reverse Mortgage loan, and what costs you will be confronted with whilst obtaining this loan, to ensure there are no hidden surprises waiting for you down the track and that you are well informed before proceeding with a Reverse Mortgage loan.

Contact Us

To speak to one of our experienced lawyers about your Reverse Mortgage loan, call 1800 957 936, email or submit an enquiry on our website.

We are available to meet with you at any of our local offices (Brisbane, Gold Coast, Beenleigh, Cleveland and Jimboomba) or by telephone or video-conference.

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