What is a reverse mortgage?

A reverse mortgage is a type of loan that has been specifically designed for seniors over the age of 62 years to borrow money using the equity in their home as security. The loan can be taken as a lump sum, a regular income stream, a line of credit or a combination of all these options.

Interest is charged like any other loan, except the borrower is not required to make repayments while they live in their home — the interest compounds over time and is added to the loan balance. The borrower remains the owner of their house and can stay in it for as long as they wish.

The loan must be repaid in full (including interest and fees) when one of the following triggers take place:

• The borrower sells their home.

• They move into permanent aged care.

• The last surviving borrower passes away.

• No income is required to qualify; however, credit providers are required by law to lend money responsibly, so not everyone will be able to obtain a reverse mortgage.

A reverse mortgage can be used for a number or purposes. As well as a regular income stream, they can withdraw a lump sum which could be used for:

• Repairs to the home

• Purchase lifestyle assets such as a motor vehicle, caravan or boat

• Take a holiday

• Refinance debt

• Pay large unexpected costs such as medical or dental

• Assist children or grandchildren; however, some lenders may have a restriction on this purpose

• Accommodation bonds for aged care.

Lenders provide a range of interest rate options; with the most common being the variable rate loan which can change at any time. Other options that may be available by some lenders are:

• Fixed rate – term – the rate is locked in for a set period of time, up to 10 years

• Fixed for life – the rate is fixed for life and generally only available to borrowers over 75 years of age

• Capped variable – like a variable rate loan the interest rate can change at any time but has a ceiling which is guaranteed by the lender not to be exceeded.