Reverse mortgages – what are they?

The name “reverse mortgage” doesn’t really describe very well what sort of mortgage this is.The word mortgage itself is just a descriptive word for a loan. A mortgage is nothing more than a (secured) loan.

A reverse loan is very much like a normal loan, but with the significant difference that there is no requirement that the loan be repaid in the usual manner. Usually the loan is only repayable when the borrower’s house is sold, or the borrower dies.

In this way, the borrower can get access to funds where he or she doesn’t have an income that would enable the borrower to repay the loan in the normal way. In other words, it gives access to funds where funds would not otherwise be available.

However, there remains the obligation to pay interest, and this interest is added to the loan. Accordingly, the loan increases from year to year. After the first year interest is added to the loan, but after the second and subsequent years you are not only paying interest on the original loan, but on the loan plus the accumulating interest. This is called compounding interest.

For this reason one has to look very carefully before embarking upon a reverse mortgage transaction.

There are a variety of issues surrounding reverse mortgages, including that they can disinherit children if significant equity is eroded away from the property that is mortgaged. Many lenders require that the borrower seeks both financial and legal advice before proceeding.

The average reverse mortgage loan in Australia is in the region of $60,000.

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