Reverse mortgages are a useful tool that can offer greater financial flexibility or security for those aged 55+. This is especially relevant as traditional banks are often reluctant to lend to older borrowers.

Having a pre-existing mortgage on the property is not generally an impediment to applying for a reverse mortgage.  

However, when you take out a reverse mortgage the lender will take a registered first mortgage over the security property. This means that any other mortgage on the property will have to be paid out as part of the settlement process – i.e. you will need to refinance from your current mortgage to the reverse mortgage.

So, what happens?

The existing mortgage is paid out as a requirement of the settlement process. This means that we will work with your current financial institution and disburse the necessary funds directly to them to pay out your existing mortgage. As part of this process, you will need to obtain a Discharge Authority – a form used to release the security you’ve previously provided for a home loan.

This applies even if little-to-no debt is owed on the mortgage. The mortgage will still need to be discharged.

The funds for this will be drawn upfront from a lump-sum payment made at settlement, regardless of how you wish to draw down the rest of the loan.

Benefits

Refinancing with a reverse mortgage can be useful if meeting regular mortgage payments is proving challenging especially as people transition into retirement. As a reverse mortgage doesn’t require regular repayments, using one to pay out a regular mortgage and consolidate debt can ease a significant amount of month-to-month financial pressure.  

Additionally, depending on your maximum available Loan-to-Value ratio, you can potentially access additional funds above the amount required to refinance the existing mortgage.

Other Considerations

If you have a mortgage on another property which is not being used as the security property for the loan, this debt may still be considered when assessing your liability position – though, it won’t necessarily be a condition of the new loan that you pay out that the loan on the other property.

Other loans (non-mortgage) will also be considered when assessing your loan suitability. As above, they will not necessarily require being paid out in order for you to take out a reverse mortgage.

If your outstanding mortgage debt is higher than the amount you are eligible to receive, based on your age and the value of your property, then you may be ineligible for a reverse mortgage.  

What are the disadvantages?

If you can comfortably pay off your existing mortgage with regular repayments and don’t require additional funds, a reverse mortgage may not make good financial sense. Typically, reverse mortgages are priced higher than traditional loans primarily due to the additional risk taken on by the lender as a reverse mortgage often has no fixed term and does not require regular repayments.

As reverse mortgages access the equity in your property, over time your share of the equity will be reduced if you don’t make any repayments. It’s important to consider how this may affect your financial planning, such as any inheritance you may wish to leave behind.

A reverse mortgage may also affect your eligibility for the Age Pension and your ability to afford aged care. We recommend speaking to Centrelink or obtaining financial advice if you are unsure about this.  

As with any big financial decision, ensure you weigh up all the benefits and drawbacks as they relate to your circumstances and carefully consider if the product is right for you.  

If you’re interested in finding out more about reverse mortgages, click here to learn about Equity Empower – our competitively priced reverse mortgage loan for over 55s.