Reverse mortgage is a term that for some people is loaded with a range of emotions, and sometimes misconceptions. These words sometimes elicit suspicious or hostile reactions, and yet for others, they represent a solution to a range of retirement problems.

A lot of negative history about reverse mortgages stems from the late 1990s and early 2000s when reverse mortgage products were in their infancy. 

In recent years, since the passing of the National Consumer Credit Protection Act (2012), reverse mortgages are much more rigorously regulated – in fact, they are now one of the most stringently regulated credit products in Australia, with explicit protective measures in place for consumers at both the start and end of the loan process. 

So, what are some of the major misconceptions or myths that are circulating about reverse mortgages?

Myth one: I can lose my home

You will not lose your home – and you can live in your home as long as you choose. Your home continues to be your home, and you retain ownership of the title. There is no risk of default on your home because you do not need to make regular payments, and a lender cannot forcibly remove you from your home. You do, however, need to abide by the loan’s terms and conditions, which will include things like keeping up-to-date on insurance and rates payments and keeping your home well maintained.

Myth two: I could end up owing more than my home is worth

This is a real furphy – this is not possible, and you are well protected by law: the ‘no negative equity guarantee’ (NNEG) clause in the National Consumer Credit Protection Act (2012). At the end of your loan, you cannot owe more than your home and property is worth, no matter what occurs to the value of your property.

Myth three: I’m disinheriting the kids

No. In fact, home equity can be used to re-inherit the kids! 

Because Australians are living longer, bequests are often delayed past the time when your children face their biggest financial needs. 

Using home equity, you can help your kids when they need it most: buying their first home, educating their kids, or paying down debt.  Being proactive and acting earlier with your financial planning allows you to choose the timing of a bequest, which can have major benefits for your family when they actually need it rather than later.

Myth four: A reverse mortgage is a ‘last resort’

Not true.  Reverse mortgages are used by retirees across the socio-economic spectrum.  The government’s Retirement Income Review identified home equity as part of the ‘third pillar’ of retirement funding.  

Most retirees have more savings in the family home than in super – a reverse mortgage helps you access those savings to enhance your lifestyle and wellbeing in retirement, without needing to sell the family home you love. 

Reverse mortgage products are increasingly sophisticated, providing access to and tapping into your own capital and income to improve your retirement funding, and are not considered a ‘last resort’.

Myth Five: There’ll be nothing left to cover aged care costs

Loan to Value calculations for reverse mortgages are conservative that can start at 15% for a person aged 60 or over and increase by 1% per year thereafter.  This would comfortably allow a reverse mortgage to pay for ageing in place (or home care) and have the benefit of independent living and ageing in your own home.  

With a reverse mortgage, it’s possible to age in place by remaining at home and in your community rather than moving into residential aged care.  Based on your age, you could unlock as much as 45% of the equity in your home, easily allowing coverage of aged care costs.

Myth six: Downsizing is a better option for accessing equity

This seems the right solution but a lot of Australian retirees are opposed to downsizing, because they are emotionally attached to their current home, and a reverse mortgage allows them to stay where they love to be and continue to host family and friends.

Also, there are considerable costs involved in selling a house that needs to be considered, both financial and social. Apart from the desire to stay in your own home for emotional reasons, it may be financially better to do so.

Selling your home may also impact your eligibility for the Age Pension.

Myth seven: I already have a mortgage so I can’t get a reverse mortgage

In many situations, a reverse mortgage can refinance the existing mortgages (and even another reverse mortgage). Bank mortgages need to be repaid monthly, which can have cash flow implications for retirement, and the risk of default if you can’t meet those payments. A reverse mortgage provides financial flexibility for retirement, without the risk of a bank foreclosure.

To see how a reverse mortgage could improve your retirement funding, download our free Reverse Mortgage FAQs.

Would you like more in-depth reverse mortgage information? Schedule an obligation free call with our reverse mortgage specialist.