Reverse Mortgages

Reverse Mortgages and the Relevant Considerations

It is very common for older Australians to be “asset rich but cash poor” which can make the idea of taking out a reverse mortgage an appealing option.

What is a reverse mortgage?

A reverse mortgage is a complex financial product (generally only available to people that are aged 60 and over), that allows a person to borrow money by using their home as security.  A key feature of a reverse mortgage is the fact that the borrower is usually not required to make repayments on the loan while they remain living in their home. It is also common for reverse mortgages to include a mechanism that allows the borrower to continue borrowing additional funds over time.

Even though repayments may not be required to be made while the borrower remains living in the property, interest will be charged on the loan and will continue to compound over time. Usually, reverse mortgages are required to be repaid in full (including the cost of interest and any additional costs incurred under the reverse mortgage) within a set amount of time from when the borrower either passes away or moves out of the property.

Important considerations

By accessing the equity in their property now, a borrower could be left with significantly less financial resources.  This could impact their ability to afford to pay for expenses in the future, such as the cost to move into an aged care facility. It is strongly recommended that financial advice be obtained before entering into a reverse mortgage.

In addition to the potentially significant and perhaps, irreversible, impacts on a borrower’s financial position, reverse mortgages can also impact many other aspects of a borrower’s life. Some of these potential impacts are outlined below.

Eligibility for pension entitlements and other Government benefits

A borrower may lose their eligibility to receive the aged pension and/or the amount that they are entitled to receive may be significantly reduced as a consequence of entering into a reverse mortgage. A borrower may also lose their eligibility to receive other Government benefits, such as carer’s allowance, low cost and no interest loans and/or other support mechanisms.

The entitlements of the borrower’s spouse, carer and/or children could also potentially be impacted by the borrower’s commitment to a reverse mortgage.

Restrictions over the use of the property

A reverse mortgage will usually include conditions that place restrictions on, and impose obligations, that affect how the borrower can use their home. Common examples of these potential restrictions and obligations include the following:

• Requirement to obtain the lender’s consent before signing a sale contract (particularly in circumstances where the re-sale value is not sufficient to pay out the reverse mortgage in full)
• Restrictions on renting out the home without the lender’s consent
• Restriction on carrying out renovation works without the lender’s consent
• Requirement to obtain the lender’s consent before allowing other people to reside in the property with the borrower

Risk of foreclosure

If a borrower fails to comply with their obligations under a reverse mortgage and goes into default, there is a risk that, in certain circumstances, the lender may choose to evict the borrower and sell the property, which would result in the borrower losing their home.

The rights of others who also live in the property

If a borrower moves out of the property (such as in circumstances where they need to move into a care facility) or passes away, this will usually trigger a requirement for the loan amount (including the interest incurred on the loan and any additional costs incurred under the reverse mortgage) to be repaid in full. Other people who are living in the property may be required to move out and find new living arrangements if the property needs to be sold in order to repay the reverse mortgage.

Impacts on estate planning

A reverse mortgage can greatly reduce the size of a person’s estate, particularly if the property is their main asset. It is important for a borrower to review their estate plan to see whether changes need to be made as a consequence of entering into a reverse mortgage, especially in circumstances where the property is specifically gifted or otherwise referred to in the borrower’s current Will.

We can assist you

If you are considering taking out a reverse mortgage and would like to obtain legal advice on the specific terms of the proposed agreement, or require advice further on how a reverse mortgage will impact your estate plan, please do not hesitate to contact one of our commercial solicitors on (07) 4963 2000 or via the link below.