- Reverse mortgages 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).
- Home reversion schemes allow you to sell all or part of your home at a discounted price – usually between 35% and 60% 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.
In most cases you will need to be at least 60 years old and own your home outright (or use the equity release money to pay off any existing loans) to be eligible.
Things to consider – now and in the futureA financial decision to meet your needs at 60 can look very different at 75 when your needs and circumstances may have changed significantly. These products can be complex and involve anticipating your long-term needs, including how long you think you might live and what your health or care needs might be in the future. 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.
| About you | What to consider |
| 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.
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| 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. |
| Do you receive or expect to receive any income from Centrelink or the Department of Veterans Affairs? | 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. |
Products for younger people
Equity release products for people younger than 55 have recently been launched in Australia. These are called shared appreciation mortgages (or SAMs). 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 for consumers
Each of the equity release products can be very complex and if used inappropriately or with poor advice, they may have a bad long term impact on your finances.
For example, in the UK there was heavy promotion of reverse mortgages to retirees in the 1980s. But when prices moved against consumers and their debt exceeded the value of their homes, many were evicted. Then in the late 1990s, when home values increased dramatically, many consumers who had taken up SAMs considered, in hindsight, that they had made a bad bargain and that they were required to give up too much of the capital gain.
More recently, in Australia:
- a home reversion scheme run by Money for Living went into administration. ASIC is currently involved in legal proceedings alleging that Money for Living was engaged in misleading or deceptive conduct; and
- a credit union, Transcomm, which offers a reverse mortgage, entered into an enforceable undertaking with ASIC in relation to misleading and deceptive conduct.
For these reasons it is extremely important that you fully understand the equity release product you're buying – including how much it may cost you over the long term and what risks may be involved.
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. |
Issues and concerns about equity release products?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.
Here's how to complain.
AdviceThe best way to address some of these risks and ensure you get the product that is most appropriate for your needs is to get
independent legal and financial advice.
- Make sure you get a lawyer to read the terms and conditions and explain exactly what you're signing up for.
- On the financial side talk to someone who understands financial matters, knows your personal needs and will put your interest ahead of anything else. Always check how your adviser is being paid for the advice they give you.
- 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.
- 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.
Calculators
FIDO has a reverse mortgage calculator that can show 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.
