Guide to reverse mortgages

How they work

A reverse mortgage allows someone aged 60 or over to borrow money against the value of their home. It usually only needs to be repaid when you sell the house, permanently move out (such as to go into long-term aged care) or die.

Reverse mortgages work in the opposite way to home loans. Instead of the loan sum diminishing because of your repayments, interest is applied to your loan so the debt increases. You're not required to make any repayments but the impact of fees and interest means the debt grows over time. At current interest rates, the amount you owe would double in less than 10 years.

Disadvantages

Reverse mortgages can limit your options in the future:

• You may not have enough money left to fund moving into a retirement village.
• The value of your estate may be much less than anticipated because the debt increases over time.
• If you take the loan as a lump sum it may have an impact on your eligibility for Centrelink payments.
• If you live with a partner or spouse and you're joint owners of the house, the reverse mortgage would be in both names so your home is protected as long as one of you lives there. If only one of you owns the house, be warned: the loan will only be in one name so it will have to be repaid when the partner who owns the house dies or moves into residential aged care.

Contract concerns

Many contracts are confusing and hard to interpret. We think consumers need to be very cautious when signing up:

• Wide-ranging default clauses. Borrowers can be in default for minor contract breaches. When you're in default the lender can require immediate repayment of the whole loan and may charge you a higher interest rate. This may lead to enforcement action and the sale of your house.
• The No Negative Equity Guarantee (lender covers any shortfall if your loan balance exceeds the proceeds from the sale of your house) sometimes seems to be so limited that it might not protect you at all.
• Some contracts are based on standard home loan contracts which include many limitations to your rights.

Want to know more?

See the full report from Choice. Choice is an independent, non-profit organization for Australian consumers.