Reverse mortgage and home equity release

How to decide if a reverse mortgage or home reversion is right for you

If you’re age 60 or over, own your home and need to access money, ‘home equity release’ may be an option.

There is risk involved and a long-term financial impact, so weigh up the pros and cons first. Get independent financial or legal advice before you go ahead.

How home equity release works

‘Equity’ is the value of your home, less any money you owe on it (on your mortgage).

‘Home equity release’ lets you access some of your equity, while you continue to live in your home.

For example, you may want money for home renovations, medical expenses or to help with living costs.

There are two types of equity release:
• Reverse mortgage
• Home reversion

The amount of money you can get depends
on:
• your age
• the value of your home
• the type of equity release

Your decision could affect your partner, family and anyone you live with. So take your time to talk it through, get independent advice and make sure you understand what you’re signing up for.

Reverse mortgage

A reverse mortgage allows you to borrow money using the equity in your home as security.

If you’re age 60, the most you can borrow is likely to be 15–20% of the value of your home. As a guide, add 1% for each year over 60. So, at 65, the most you can borrow will be about 20–25%. The minimum you can borrow varies, but is typically about $10,000.

Depending on your age, you can take the amount you borrow as a:
• regular income stream
• line of credit
• lump sum, or
• combination of these

How a reverse mortgage works

You stay in your home and don’t have to make repayments while living there. Interest charged on the loan compounds over time, so it gets bigger and adds to the amount you borrow. You repay the loan in full, including interest and fees, when you sell or move out of your home.

You may be able to make voluntary repayments earlier, if you wish. You may also be able to protect a portion of your home equity from being eroded by the loan. For example, to ensure you have
enough money left to pay for aged care.

What a reverse mortgage costs

The cost of the loan depends on:
• how much you borrow
• how you take the amount you borrow (for example, a lump sum will cost more due to compounding interest)
• the interest rate and fees (for example, loan establishment, ongoing fees, valuation)
• how long you have the loan

Use the reverse mortgage calculator

See how much a reverse mortgage would cost over different time periods, such as 10 or 20 years.

A lender will go through reverse mortgage projections with you, showing the impact on your equity over time. They will give you a copy of this to take away, so take your time to digest it.

Ask questions if there’s anything you’re not sure about.

Pros and cons of a reverse mortgage

Pros
• You remain owner of your home and continue to live in it.
• A small amount of money each year could supplement your income in retirement.
• A lump sum may fund renovations on your home so you can stay in it longer.
• You could free up money for an urgent need, such as medical treatment.
• It may help secure aged care accommodation until you sell your home.

Cons
• Over time, your debt will grow and your equity will decrease (see our case study below).
• Interest and fees compound and add considerably to your loan balance.
• The interest rate is likely to be higher than on a standard home loan.
• It could affect your eligibility for the Age

Pension.
• It could affect your ability to afford aged care.
• It could eat into money you need for future medical bills or home maintenance.
• You may not have enough money left for living expenses or to support family, if needed.
• If you’re the sole owner of your home and someone lives with you, that person may not be able to stay when you move out or die.
• If you are borrowing to invest, it puts your whole home at risk — not just the portion you are investing.

Negative equity protection

Reverse mortgages taken out from 18 September 2012 have negative equity protection. This means you can’t end up owing the lender more than your home is worth (market value or equity).

If you took out a reverse mortgage before this date, check your contract. If it doesn’t include negative equity protection, talk to your lender or get independent advice on what to do.

Home reversion

Home reversion allows you to sell a proportion (a ‘share’ or ‘transfer’) of the future value of your home while you live there. You get a lump sum, and keep the remaining proportion of your home equity.

How home reversion works

The home reversion provider pays you a reduced (‘discounted’) amount for the share you sell. Depending on your age, this may be 25% or more of the current value of the share. For example, suppose your home is currently worth $400,000 and you sell a 25% ($100,000) share of the future value.

The provider may only offer you $25,000 to $40,000 to buy that share. When you sell your home, you pay the provider their share of the proceeds. So, if in 20 years time you sell your home for $800,000, the provider gets 25% of that amount: $200,000.

What home reversion costs

It’s not a loan, so you don’t pay interest.

You pay a fee for the transaction and to get your home valued (as a guide, around $2,000). You may also have to pay other property transaction costs.

Home reversion costs you the difference
between:
what you get for the share of your home you sell now, and what it’s worth in the future.

The more your home goes up in value, the more you’ll pay the provider when you sell it.

Pros and cons of home reversion

Pros
• You sell a share of your home’s future value and continue to live in it.
• A lump sum may enable you to do renovations or maintenance on your home, so you can stay in it longer.
• You could free up money for an urgent need, such as medical treatment.
• It may help secure aged care accommodation until you sell your home.
Cons
• You will have a lower share of the equity in your home.
• It may be difficult to understand how the transaction works and what it will cost.
• It could affect your eligibility for the Age

Pension.
• It could affect your ability to afford aged care.
• It could eat into money you need for future medical bills or home maintenance.
• You may have less flexibility if your circumstances change.
• If you’re the sole owner of your home and someone lives with you, that person may not be able to stay when you move out or die.

Consider other options 

If you need money, other options to consider include:
Government benefits — Check if you’re eligible for the Age Pension or government benefits.
No or low interest loan — Lets you borrow a small amount of money quickly for essential goods or car repairs. There are no fees.
Pension Loans Scheme — A non-taxable loan for pensioners to top up your government benefit payments, using your home as security. See the Department of Human Services or Department of Veterans’ Affairs for information.
Downsizing — If you’re thinking about selling your home and downsizing, consider the cost of buying and selling.
Check if it affects your government benefits.
Other support — If you’re struggling to make ends meet, see urgent help with money for free services that can help.

Get independent advice

Before making the decision to apply for a reverse mortgage or home reversion:
Get independent advice from a financial adviser or legal professional.
Ask the Department of Human
Services Financial Information Service how it will affect your pension or government
benefits.

Chris Connolly
Connolly Wealth Management
Level 1, 441 South Road
Bentleigh  VIC  3204

(P) 03 9591 8000
(F) 03 9530 8375
(E) chris@connollywealth.com.au
(W) www.connollywealth.com.au

Disclosure: Christopher Connolly (280099) and Connolly Wealth Management Pty Ltd (333350) are Authorised Representatives of Wealthsure Financial Services Pty Ltd AFSL 326450.

Switching Home Loans

Work out if you’ll save money by switching to another mortgage.

Refinancing your home loan to take advantage of a lower interest rate might save you money. Before you switch, make sure the benefits outweigh the costs.

If you’re struggling with your home loan repayments, see ASIC Moneysmart website’s “problems paying your mortgage” article for help.

Before you decide to switch.

If you’re thinking about switching home loans, you’re probably focused on getting a better interest rate. But there are other things to consider before switching.

Ask your current lender for a better deal.

Tell your current lender you are planning to switch to a cheaper loan offered by a different lender. To keep your business, your lender may reduce the interest rate on your current loan.

If you have at least 20% equity in your home, you’ll have more to bargain with. Having a good credit score will also help with negotiations.

Compare any loan they offer you with the other loans you’re considering. See ASIC Moneysmart website’s “choosing a home loan” article for tips on what to look for.

Negotiate the length of the new loan.

Some lenders will only refinance with a new 25 or 30-year loan term. You could end up with a longer loan term than the years left to pay off your current mortgage.\

The longer you have a loan, the more you’ll pay in interest. If you do decide to switch, it would be beneficial to negotiate a loan with a similar length to your current one.

Weigh up the cost of lender’s mortgage insurance.

If you have less than 20% equity in your home, you might have to pay lender’s mortgage insurance (LMI). This can increase the cost of switching and outweigh the savings you’ll get from a lower interest rate.

If you decide to switch, ask for a refund of some of the LMI from your current loan.

Compare the costs of switching your mortgage.

Get at least two different quotes on home loans for your situation. A mortgage broker or a comparison website can help you find out what’s available.

Comparison websites can be useful, but they are businesses and may make money through promoted links. They also may not cover all your options. See ASIC Moneysmart website’s “what to keep in mind when using comparison websites” article.

Compare these fees and charges:
Fixed-rate loan- If you are on a fixed-rate loan, you may need to pay a break fee.
Discharge (or termination) fee- A fee when you close your current loan.
Application fee- Upfront fee when you apply for a new loan.
Switching fee- A fee for refinancing internally (staying with your current lender but switching to a different loan).
Stamp duty- You may be liable for stamp duty when you refinance. Check with your lender.
Valuation Fee- A new loan provider may require you to get a formal valuation on your property.

Check if you’ll save by switching
Once you have a shortlist of potential loans and the fees involved, use the ASIC Moneysmart’s mortgage switching calculator to work out if you’ll save money by changing home loans. It also shows how long it will take to recover the cost of switching.

Chris Connolly
Connolly Wealth Management
Level 1, 441 South Road
Bentleigh  VIC  3204
(P) 03 9591 8000
(F) 03 9530 8375
(E) chris@connollywealth.com.au
(W) www.connollywealth.com.au

Disclosure: Christopher Connolly (280099) and Connolly Wealth Management Pty Ltd (333350) are Authorised Representatives of Wealthsure Financial Services Pty Ltd AFSL 326450.

 

 

Source:
https://moneysmart.gov.au/homeloans/switching-home-loans
In this article we have not taken into account any
particular person’s objectives, financial situation or
needs. You should, before acting on this information,
consider the appropriateness of this information
having regard to your personal objectives, financial
situation or needs. We recommend you obtain financial
advice specific to your situation before making any
financial investment or insurance decision

Riding the rollercoaster: 6 feelings you’re likely to experience as a first-time buyer

There’s no doubt about it – buying your first home is one of the most rewarding experiences of your life! However, it is an emotional journey. Here are 6 feelings you may experience as part of the purchasing roller coaster (buckle your seatbelts – it’s quite a ride!).

1) Excitement at the prospect of buying

You’ve been working hard to save a deposit and it’s finally time to purchase. When that time comes, it’s like someone has opened the door to a whole new world. And it’s an exciting place indeed! At this point, the anticipation is killing you.

2) Confusion about what exactly is involved

You’re a rookie, so of course, the purchasing process can seem overwhelming and daunting. Where does one start? What kind of research is required? What type of loan is right for your needs?

Here’s a quick rundown of the steps involved:

1. Apply for pre-approval

2. Do your research and find the right home

3. Have your conveyancer check the contract of sale

4. Organise building and pest inspections

5. Put in an offer or go to auction

6. Finalise your home loan

7. Do a final inspection on the property

8. Settlement

9. Move-in!

3) Relief when you discover how we can help

Ahhh, you’re not in this alone. That’s right – we can walk you through the buying process, starting with the research component. Our free suburb and property reports offer a wealth of information, from details about capital growth and median values to recent sales data.

Next, we’ll take care of your finance for you. We can:

  • Explain your borrowing capacity (how much a bank will lend you)
  • Arrange pre-approval on your finance (so that you’re ready to make offers or bid at auction)
  • Explain loan features that may save you money in interest (for example offset accounts and redraw facilities)
  • Line you up with the right home loan for your specific needs
  • Take care of the paperwork for you.

4) Exasperation as you look for the right property

If you’re one of the lucky ones who finds the right property early, you may escape the exasperation stage altogether. However, if you find your weekends being consumed by inspection after inspection to no avail, it can leave you feeling exhausted and discouraged.

Don’t despair – your dream home is out there. Just remember, with every inspection you’re one step closer to the thrill of finding your very own pad!

5) Nervy during negotiations

You know when you’re at the top of the roller coaster incline and it’s about to drop? Waiting for a vendor to accept your offer or fronting up at an auction can feel a bit like that. There are bound to be butterflies in your stomach – just hold on tight and remember the best is yet to come.

6) Elation when the paperwork is signed and it’s yours!

There’s nothing as rewarding as receiving a shiny new set of keys and walking through the front door into your own slice of real estate. You’ve survived the journey and probably even enjoyed it! It’s at this point you’ll feel pure, unadulterated joy.

Buying your first home is an experience you’ll never forget. The thrill. The adrenalin. And the rush of emotions when it’s finally yours are hard to beat. If you’re ready to purchase your first home, please get in touch. Let us be your conductor; you just enjoy the ride.

Chris Connolly
Connolly Wealth Management
Level 1, 441 South Road
Bentleigh  VIC  3204
(P) 03 9591 8000
(F) 03 9530 8375
(E) chris@connollywealth.com.au
(W) www.connollywealth.com.au

Disclosure: Christopher Connolly (280099) and Connolly Wealth Management Pty Ltd (333350) are Authorised Representatives of Wealthsure Financial Services Pty Ltd AFSL 326450.

 

Disclaimer
The information contained in this email and its links/attachments are general in nature and does not take into account your personal circumstances, financial needs or objectives. Before acting on any information, you should consider the appropriateness of it and the relevant product having regard to your objectives, financial situation and needs. In particular, you should seek the appropriate financial advice and read the relevant Product Disclosure Statement or other offer document prior to acquiring any financial products.