How to tap into home equity
Are you looking to make retirement a little more comfortable? Unlocking the equity in your home could be just what you need.
A reverse mortgage, or equity release, allows an increasing number of asset-rich and cash-poor retirees to turn to the equity in their family home for rising living costs or one-off expenses, like that trip to Italy you’ve always dreamed of going on.
The loan allows you to borrow money using the equity in your home as security and is available as a lump sum, a regular income stream or a line of credit. You can also access it via a combination of these options.
Interest is compounded over time and added to the loan balance, which is repaid in full when you sell the house, move into aged care or die. According to the Australian Securities and Investments Commission, no income is required to qualify for the loan but credit providers are required by law to lend money responsibly so not everyone will have access to this type of loan.
What’s the appeal of reverse mortgages?
South Australian-focused finance company, HomeStart Finance, says more retirees are choosing reverse mortgages to access home equity in the face of limited finance options.
“Most lenders are reluctant to offer personal loans to retirees due to their employment status, even though they may be sitting on valuable assets,” HomeStart chief executive John Oliver explains. "We’ve seen positive growth in Adelaide’s property market which hints that the market has stabilised.
“Home ownership in Australia is higher among baby boomers than in any other demographic and reverse mortgages provide them with the ability to access the equity they’ve worked hard to build to maintain their lifestyle when their income options are limited.”
HomeStart offers a Seniors Equity Loan for South Australian residents over the age of 60 to unlock equity on a “no negative equity” guarantee, which means you’ll never owe more than the value of your home. Loan amounts for reverse mortgages are based on the borrower’s age and the value of their property.
Westpac, Bankwest and St George are a few of the other financial institutions which offer similar products for residents in other states.
Are there drawbacks?
The problem with these types of loans is interest rates are generally higher than average home loans and the debt can rise quickly as a result of the interest compounding over the term of the loan.
Mr Oliver admits there has been some negativity associated with reverse mortgage products due to the perceived risk of ending up with negative equity, where the mortgage becomes higher than the value of the house.
“However, the reverse mortgage landscape has changed dramatically since they were first introduced in the mid-90s. There are now regulations in place that provide consumers with a no negative equity guarantee and best practice also recommends that the borrower seeks legal and financial advice before proceeding,” he says.
“The ‘no negative equity guarantee’ introduced in 2012 guarantees borrowers that if, when their house is sold, the proceeds of the sale are less than the amount owed to the lender, the lender is unable to pursue the borrower or their beneficiaries, for the shortfall. Lenders are also required to clearly communicate the impact of a reverse mortgage and associated risks.”
Always remember…
With many reverse mortgages, repayments are voluntary. However, borrowers need to understand that if no repayments are made, debt can compound quickly. At the very least, borrowers should try and cover the interest to contain the debt.
Before going into any arrangement be aware of the risks involved and speak to a financial adviser before accessing any loan. If you’re receiving Centrelink payments, it’s worth going to your local office to see how it may affect your pension eligibility.