New tool makes decisions easier

Leave plenty of spare borrowing capacity

MARIA BEKIARIS

Retirees who own the family home but have few other assets may see a reverse mortgage as the answer to any cash flow problems. Generally you have to be over 60 to be eligible and you will be able to borrow between 15% and 40% of the value of your home, depending on how old you are. No repayments have to be made until you sell the house or die.

If you are wondering whether a reverse mortgage is suitable for you, why not play around with the new reverse mortgage calculator at www.moneysmart.gov.au, ASIC’s consumer site?

“The calculator is a great tool if you or someone in your family is considering a reverse mortgage,” says ASIC’s senior executive, financial literacy, Robert Drake. “It allows you to test ‘what if’ scenarios and to understand the financial implications before you decide. The calculator shows how much your debt may increase over time and what this may mean for your equity in your home. It also shows how your home equity can be affected by changes in interest rates and house prices over future years.”

MoneySmart offers these tips for anyone considering a reverse mortgage:

• Be wary of borrowing the maximum. The more you borrow, the more quickly your debt will grow. Leave plenty of spare borrowing capacity in case you need it in the future.

• Check the fees and charges. Reverse mortgages charge a higher interest rate than regular home loans. Ensure you understand the total fee package, including establishment and ongoing fees. Ask if you can pay off the loan early and if any extra fees are involved.

• Ask if there are special terms and conditions. These may restrict what you can do with the money. Find out what happens if you sell your home early or if you sell it for much more than the provider expects.

• Ask the provider if it belongs to an external dispute resolution scheme, such as the Financial Ombudsman Service. If things go wrong, you will know where to go.

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