For many Australian retirees on limited funds, this becomes the big dilemma. In most states, the process of selling your home and downsizing to buy a smaller dwelling will cost $40-50,000 by the time you factor in stamp duty, agents fees and legal costs etc.

In addition, many people are forced to re-locate to a new area, away from their family, doctor, friends and community. This is often the most distressing aspect of downsizing.

However, accessing some of the value in the home via a reputable reverse mortgage or equity release provider can give you more cash and allow you to stay in the home you love. You need to do the sums, but in many cases it will be more cost effective to borrow via a reverse mortgage or similar, than to downsize. A good specialist finance broker will help you with this exercise.

All reputable Australian equity release lenders will insist that you obtain independent legal advice as part of the transaction. Indeed, you will not receive any funds until advice has been signed-off by your solicitor. This is of course a good thing: it protects you from potentially entering into an agreement that you don’t understand. All SEQUAL lenders abide by a strict code of conduct that demands this as a requirement for membership.

However, many people do not realise that this requirement also protects the lender. Independent legal advice is the best way they have of guarding against any possible mis-selling by dodgy mortgage brokers. It also ensures the lender’s legal position is sound in the case of any possible future dispute with the borrower or their estate.

If your reverse mortgage lender is not asking for you to obtain legal advice, you should really question their credibility. Check your lender here. 

Unless you need a lump sum of cash for a specific reason (eg; paying out credit cards or to fund home improvements), then a reverse mortgage line of credit will often be the best way for senior Australians to access the money from their reverse mortgage.

How does it work?

A reverse mortgage line of credit is a pre-approved limit of equity that you can draw down gradually over the years as you need money. You only incur interest on the money you use, and the rest of the available money is (usually) still there for future possible use. The interest saving you generate by drawing the money gradually through a ‘line of credit’ can be very substantial.

Eg; Drawing $100,000 gradually over 10 years will cost 30% less than in interest than if you took the same amount as a lump sum.

WARNING: Some Australian reverse mortgages purport to offer a ’line of credit’ facility, but actually charge the interest on the money already drawn from the line of credit account. That is, if you have a line of credit for $50,000 and you have used $20,000, you might think you have $30,000 left but some banks actually deduct the interest on $20,000 from the line of credit account so that over time the $30,000 available is significantly eroded. Make sure you ask your bank or broker  if your reverse mortgage line of credit is ‘quarantined’ from the compounding interest charge.

For help with this, email me at info@reversemortgagewatch.com.au to check your loan.

Reverse Mortgage Watch has written about the new government reverse mortgage information service, ERRMIS, before . This is a free service provided through the National Information Centre on Retirement Investments (NICRI) that’s designed to help Australian seniors make more informed choices about equity release finance. In a coup for Reverse Mortgage Watch, we’re delighted to bring you an exclusive interview with the director of ERRMIS, Wendy Schilg.  

RMW: You’ve been up an running for a 4-5 months now, how has the public response been to the launch ERRMIS?Wendy Schilg: The response from the public has been really positive. The service has filled a much needed void in the market, and people have been relieved to find an impartial consumer organisation that provides independent information. To enter into a reverse mortgage is a major decision and obviously an emotional experience for many retirees. I think that our service offers support to people during the decision making process. As one caller said in a letter “Thank you so much for all your help – you have kept the nervous break-down at bay for the moment”  RMW: What are the main questions or issues that people are calling with?Wendy Schilg: Safety is the main issue people want to talk about. Questions may relate to any potential decreases in the pension as a result of the mortgage, the amount of interest that will accrue on the loan, who the providers are and what to look out for in the contract. We also have a lot of people new to reverse mortgages who want a 10 minute Reverse Mortgage 101 course.   Callers with a reverse mortgage, or about to take one out, will often have technical or specific questions – there are great calls to receive as they give us a greater insight into the various providers and product features. 

RMW: How many calls are you taking a week at the moment?Wendy Schilg: We are averaging around 150 calls per week. It was really busy for a period in late April as a result of an article in the Centrelink publication News for Seniors, but has settled down again. At one stage we were taking over 200 calls per day – quite a bit considering that there are only 2 information officers looking after the service!

RMW: From your discussions with consumers, what do you think industry (brokers, lenders and government) can do better?Wendy Schilg: We have made a submission to the Henry Review, and also provided Government Ministers with briefings on areas we think can be improved within the industry. These include: better disclosure of break fees – a recommendation SEQUAL has already acted upon; tighter regulation of reverse mortgage providers who leave the market but maintain services to existing clients; and clearer terms and conditions documents. The Government will be looking to enhance regulation and disclosure of the Reverse Mortgage industry by mid 2010, and we will continue to work with them by providing caller feedback and raising issues. 

RMW: What does the future hold for ERRMIS?

Wendy Schilg: The Federal Government originally funded ERRMIS for a 6 month pilot. The pilot is due to end within the next few weeks. Obviously we hope to maintain the service indefinitely and we are in talks with the Government for ongoing funding. Demand and feedback has indicated that ERRMIS is well needed, and I think the Government recognizes that ongoing independent support for retirees entering into reverse mortgages is essential.

 Thanks to Wendy Schilg and ERRMIS for their contribution to Reverse Mortgage Watch. Call ERRMIS on 1800 615 676. Readers can also download their free guide here and Reverse Mortgage Watch’s free consumer reports here.   For help comparing the lenders, call Seniors First on 1300 745 745 (Disclosure: the editor of this site is Managing Director of Seniors First)  

When contemplating a reverse mortgage it is good practice to do ‘equity projections’ using the FIDO reverse mortgage calculator.

This FIDO reverse mortgage calculator is provided by the consumer arm of the Australian Securities and Investments Commission (ASIC), and is a highly useful tool for working out how much your reverse mortgage might be worth in the future. It also projects future property growth at high, low and medium levels so you can in effect work out your ‘net equity’ at any given time.

(‘Net equity’ is the amount of money you would have left after selling the house and paying back the reverse mortgage loan at any time, either during your lifetime or after you’ve passed away).    

By loading in the loan amount, your age, gender, current interest rate and likely annual rate of property growth, the FIDO reverse mortgage calculator will immediately project how much equity you will have left up to the age of 120!  You can also find the FIDO reverse mortgage calculator here and here. 

Not all banks provide reverse mortgages, and of those that do, there is a big difference between the cost and features of the products they provide.

Our recent reverse mortgage survey found that on a loan of $100,000, there is difference of $26,000 in total interest and fees over a twenty year period, between the cheapest and most expensive reverse mortgages currently available to seniors in Australia. That’s more of your money needlessly going towards fat bank profits !

That’s why it’s so important to shop around yourself, or obtain the assistance of a SEQUAL accredited equity release broker. 

There are a couple of simple things you can do to ensure that your reverse mortgage loan is working for you as efficiently as possible:

• Draw the funds out slowly, or gradually over time. This will reduce the ultimate interest bill. With some lenders you can do this via monthly instalments paid directly into your bank account
• Make payments to reduce the loan balance or interest bill, if you can afford it
• Make sure you have enough ‘cash reserve’ available for future use. If you have not established sufficient cash reserve (undrawn funds) at the outset, you may have to pay ‘top-up fees’ to the bank if you run out of money and need to go back for more. Why pay more bank fees than you need to?
• Avoid lenders with regular, or monthly fees

To check your reverse mortgage go here.

In Australia, as long as you own your own home you can get a reverse mortgage from as young as 55, however at that age you would be restricted to just 10% of the home value. As you grow older each year, you can get usually get a an extra 1% of the home value (depending on the lender).

For instance,  if you are 70 years old you would be eligible for 25% of the home value. For further assistance on whether you qualify and how much you could get, go here. 

There is no single, easy answer to this question. All of the banks and lenders who provide reverse mortgages in Australia have different rates, fees and product features. The best lender for you will be determined by your specific needs. For example: if you are seeking a 3 year fixed rate, only two lenders in the market offer this option.

Sometimes the cheapest option may not necessarily be the best solution for you. Other factors can come into play: is my lender safe? Will my cash reserve funds always be available for future use? Is the ‘No Negative Equity G’tee’ rock solid? Also, the best lender for your circumstances may be very different from the lender that is best for your friend. It’s a personal thing. In any case it’s very important you get good information and help from an independent source, such as Seniors First.

However, rates are important. There is currently a big difference in the interest rates charged by the banks, and choosing the wrong lender can end up being a very expensive mistake. To check your loan, go here.

If you’re thinking about a reverse mortgage, then your best source of information and assistance will be someone who has completed the SEQUAL accreditation. If they’ve done the course and gained the accreditation, they will have a good understanding of all the issues surrounding these loans and should be able to show you how to save many thousands of dollars in interest.

Indeed, the Mortgage & Finance Association of Australia and all of the SEQUAL lenders now make this a mandatory requirement for any finance brokers who wish to offer reverse mortgage products to consumers. Be sure to ask your broker if they are SEQUAL accredited. If they are NOT, seek assistance elsewhere immediately.