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By now, we’ve all got a pretty good handle on what a mortgage is. You ask the bank, like a Dickensian orphan, for a small loan of $1 million to buy a house and they (sometimes) grant it, albeit with some pretty hefty repayments.
But what about if we take this whole concept and reverse it, Missy Elliott-style? With a reverse mortgage, does the bank pay us money to sell a house? Is this a modern-day retelling of Robin Hood?
A reverse mortgage might sound like a good idea, but there are some pitfalls to consider.Credit:
No. Well, sort of. Reverse mortgages and other similar schemes have become increasingly popular – growing about 60 per cent annually – as a way for older Australians to access an income stream via their home, without having to sell it.
Basically, they allow people over the age of 60 to borrow money from the bank using their home’s existing equity (the value of your home minus any money you owe on it) as security. Your bank will make payments to you in either a lump sum or a regular income stream, with the loan being repaid when you sell the house or pass away. Interest is added to the loan balance over time, meaning your debt increases rather than decreases.
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You can also opt for a home equity release agreement, which allows you to sell a portion of the value of your home in return for a lump sum or payment stream. The government also runs its own program, known as the Home Equity Access Scheme (HEAS) where age pensioners can supplement their pension with a government loan, again using their home as equity.
What’s the problem?
Reverse mortgages can be useful in many scenarios, either to top up your regular income or to get a lump sum for medical expenses, renovations, or travel without having to sell your main asset.
