no negative equity

What is a Reverse Mortgage

A Reverse Mortgage is a specialised home loan product that was introduced to assist asset-backed but often cash/superannuation poor retirees live better in retirement without the need to sell their home. It allows the reverse mortgage provider to advance funds to a homeowner to use as they wish, with no ongoing repayments needing to be made, as the interest compounds over time and is paid back via a single payment upon the sale of the home. This most often occurs when the borrower moves into an aged care facility or passes away.

The main advantages of a reverse mortgage are that no income is required to qualify for the loan and that no repayments are made on an ongoing basis. Another positive aspect is that the Australian Government put in place  'negative equity protection' for all consumers. This means that no matter how long the interest on the facility compounds for, the lender can only ever access the proceeds of the sale of the property the loan is secured against. In the event that the loan balance actually exceeded this, as could be the case if the lifespan of the borrower was beyond the average, then the lender cannot go after any other assets within the estate and would ultimately have to where a loss on the total interest compounded.

The main risks with reverse mortgages are, as in the above scenario, that they can end up eroding away any equity in the property, leading to a reduction in the total value of the borrower's estate and a reduction in any inheritance being passed onto to beneficiaries of that estate. The main risk that concerns most potential applicants though is the potential negative effects it can have on government pensions being received. 

There are other factors to consider but the two points discussed above are why our Experts see the vast majority of inquiries for reverse mortgages fail to proceed. Family members often get involved to protect their inheritance, or the loss of government pension deters the person considering this from proceeding.

In all cases it is essential that anyone considering a reverse mortgage seek independant legal and financial advice.