Effective Ways of Using a Reverse Mortgage

A reverse mortgage is open to retirees, typically 60 or 65 years old and above, which allows them to release equity in their home in exchange for lump sum or regular payments, or a line of credit. While this can give borrowers a fairly convenient way to access funds, while still owning their home, there’s also a caveat in that it comes with a compounding interest structure. Because of this, the value of the loan could increase significantly in a short amount of time. Thus, it’s important to use this option appropriately and understand all the facts involved.

1.    Renovations and maintenance to the home, new car or travel.

From time to time you may require capital expenditure on your home. Or you may wish to travel and need a new car. You could of course choose to take the expense out of your pension or your savings, but a reverse mortgage could also be a viable option. By using a reverse mortgage you could free up valuable funds without dipping into your savings.

2.    For your medical expenses.

A reverse mortgage can be a valuable tool for unforeseen medical expenses that may arise. Unfortunately, the likelihood of such medical expenses increases with age. A reverse mortgage can be a viable option under such circumstances.

3.    Taking only what you need.

Lenders that offer this type of mortgage can provide up to 45% of your property’s value. While it’s tempting to take out the maximum amount, taking out only what you need might be a more practical decision. For one, a low loan amount will have a smaller impact than a larger one, so you can keep more of your home’s equity later on. This is especially important if you wish to protect your children’s inheritance or a person living with you at your home. Most lenders offer a minimum loan amount of $10,000, which may be enough if you’re going to use it to fund and overseas trip or for simple renovations.

Also, this type of mortgage may affect your pension or your other government entitlements.

Is a Reverse Mortgage Right For You?

If you’re considering taking out a reverse mortgage, but are unsure if it is the most suitable solution for you, here are some people who will be able to help you:

Your Solicitor - will be able to provide you with advice on taking out a reverse mortgage, especially on its impact to will and beneficiaries.

Financial Planner. While a reverse mortgage can have a positive effect on your finances, there could be negative ones too. Thus, it is important that you speak with your financial planner on how this type of mortgage will affect your future finances as a whole and including your pension and other government entitlements.

This is especially important if you want to ensure that your home will still have some equity left down the track.

Mortgage Broker. A professional mortgage broker, such as the ones we have at Rate Detective, will help match you with the most suitable type of loan should you decide to take out a reverse mortgage or something different. They will ask you what your needs are depending on the amount, features you’re looking for, and other details that you might deem important. From there, they will recommend mortgage products that suit those needs.


Before You Take Out a Loan

Please also refer to our other document titled “The Reverse Mortgage Information Statement” which is a federal government requirement.

Please also refer to the federal government website www.moneysmart.gov.au for additional information and calculators.

It’s also important that you compare loans before anything else. You can do this with the help of our comparison rate tool on this page. To use it, simply enter the required details on the form and then click on the ‘Compare’ button to get started. You’ll then see comparison rates of various lenders in our network.

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Published on August 8-th, 2014 in Home Loans
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.
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