Reverse Mortgages

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1. Beware of any impact on Centrelink payments
2. Keep the LVR low and don't borrow too much
3. Look for a non-recourse loan
4. Seek all relevant information in writing
5. Seek professional advice and talk to your family

1. Beware of any impact on Centrelink payments

If you are eligible for social security benefits such as the age pension, discuss your intention to take out a reverse mortgage with Centrelink to see how it affects your benefit. As a rule of thumb, borrowers can draw down up to $40,000 without affecting their pension under the Assets Test. But this amount may reduce the pension if it is not spent within 90 days.

2. Keep the LVR low and don't borrow too much

Minimum amounts you can borrow in a reverse mortgage tend to be around $10,000, however, the maximum can be as much as $1 million. Making sure your loan-to-value ratio (LVR) isn't too high is something to consider. Your loan-to-value ratio (LVR) is the percentage that you borrow relative to the total value of the home. Reverse mortgage providers all have different maximum LVRs but as a guide they will loan anywhere from around 10-20 per cent up to an age of at least 60 but get more generous as you get older and allow you to have an LVR of up to 45 per cent. By keeping your LVR low you should not find yourself in a position where your debt is worth more than your house and increase the chance there will be something left over to pass on to beneficiaries. Like any investment, speak to a licensed financial planner before you take any action.

3. Look for a non-recourse loan

Borrowers considering a reverse mortgage should look for a 'non recourse loan' that offers a guarantee of 'no negative equity'. This means you can never owe more than the value of your property as long as you abide by the terms and conditions of the loan. It also means there are no circumstances under which you can be forced out of your home to repay the debt.

4. Seek all relevant information in writing

Fully understand all costs that are associated with the loan and ensure that you receive all documentation relating to the loan in writing. This information should include the potential effect of future house values, interest rates and the capitalisation of the interest on the loan. If you are about to take out a reverse mortgage, ensure before you sign that it is written under the Uniform Consumer Credit Code to provide you with protection.

5. Seek professional advice and talk to your family

Always discuss your intention to take out a reverse mortgage with your family or friends. This is particularly important if they are going to be a beneficiary in your will. In addition, always seek independent financial advice from a qualified financial adviser, accountant and/or your solicitor to ensure you understand how reverse mortgages work and how they can affect your overall wealth.