I’ve heard a bit in the news lately about reverse mortgages, so I thought it might be worthwhile to explain what a reverse mortgage is and how it works as it’s a confusing topic for many.

What Is A Reverse Mortgage

In simple terms, a reverse mortgage is a way in which you can access cash based on the equity that you have built up in your home. The cash you receive is in the form of a loan, which you can access as a lump sum, a regular income stream or a line of credit.

You’re probably wondering why anyone would do this over getting a stock standard loan, but the reason is actually pretty simple. Reverse mortgages are targeted at asset rich retirees who are cash flow poor, many of whom do not have a regular income, which banks (more often than not) require to issue you a loan.

Benefits of a Reverse Mortgage

The main benefit in getting a reverse mortgage is that you are able to access the value of your house in the form of cash without having to sell it. This is a major draw card for people who want to stay in their own homes, but who need more money than their retirement savings, or aged pension allow for.

Just like a normal loan, a reverse mortgage needs to be repaid in full within the term of the loan (this will include interest and fees and charges). For some this may be done when they decide to move into aged care, while for others it may be left for their heirs to pay off when they sell the house after the owner of the loan passes away.

Reverse Mortgage Risks

Overall this is a useful financial instrument for many people who need to access money without selling their house, but it does come with associated risk. Some of which I have listed below:

1 – You Accrue Debt / Interest

It’s important to remember that every time you draw down on the value of your asset, you have to pay interest back to the bank. The more you extract, the more you have to pay. So be careful, check the interest rates and take only what you need.

2 – You Can Default On Your Loan

That’s right, you can default on your loan if you don’t pay back the required minimum each month. This means that it is possible that you could lose your home if you don’t stay on top of your repayments.

3 – Aged Care Concerns

One of the other really big issues that can arise is if you have to go into some form of aged care or have an extended stay in a place like the hospital. Even though you aren’t living in the house, you still have to make payments back to the loan provider, plus any other costs you have within the aged care facility or the hospital.

Summing It All Up

A reverse mortgage can be a great tool for some, but its also not going to be for everyone. I would highly recommend that anyone considering entering a reverse mortgage schedule an appointment with a qualified independent financial adviser before making any decisions.