Page 1 of 7 Proposed Information Statement Reverse Mortgage Things you should know about your reverse mortgage This statement is provided to you because reverse mortgages operate differently to other credit products, and it is important that you understand those differences. It also provides general information to help you understand the impact of a reverse mortgage on your long-term planning. You should seek independent financial and legal advice if you are considering a reverse mortgage. Entering into a reverse mortgage will give the credit provider legal rights over your property. You should not rely solely on advice from anyone who is trying to sell you a reverse mortgage as that person may not have your best interests at heart. The mortgage 1 What is a reverse mortgage? A reverse mortgage allows you to borrow money against the value of your home. You continue to own your home although the credit provider will have a mortgage over your home to secure the amount of money you owe. Typically, no repayments are required whilst you and any other named borrowers (persons named on the reverse mortgage loan document) remain in your home. However the loan must be repaid. When all borrowers have passed away, moved into long term aged care, or the property has been sold, the credit provider will usually be entitled to be repaid in full. Although reverse mortgages typically do not oblige you to make any repayments during the term of the loan, interest is charged as the loan progresses.
Page 2 of 7 2 Will I still own my home? Yes. You will still own your home, but your credit provider will have a mortgage over the property to secure the money that you owe. 3 Can the credit provider tell me how to manage my property? Your reverse mortgage credit contract will probably impose certain obligations on you, and these will affect how you manage your property. These may include a requirement to maintain appropriate insurance cover, pay council rates on time, and maintain the property. You may also need to seek approval from your credit provider before you do certain things. These may include undertaking major work on the property, such as any renovations, leasing the property, being absent from the property for an extended period of time, allowing someone else to live with you or selling the property. You should make sure you understand your obligations as there may be serious consequences if you do not obtain the approval of the credit provider before you do certain things (see paragraph 9). 4 Will I need to make repayments during the life of the loan? No. Typically reverse mortgages are not payable until you die, sell your home, or permanently move out. At that point, you or your estate will need to repay the full amount owing, usually out of the proceeds of the sale of your home. You should check with your credit provider as to the circumstances that will trigger the repayment of the loan and whether any repayments can be required during the term of the loan.
Page 3 of 7 5 What will I owe? There is no way to know for certain how much you will owe at the end of the loan. However, your credit provider is required to give you financial details about the loan. Have a look at these so you know how much the loan could cost. You can also use the Australian Securities and Investments Commission s reverse mortgage calculator (available at www.fido.gov.au) to get an idea of the cost implications of decisions you make about how much you borrow, how long you borrow for, and the impact of interest rates, property values and various fees. The amount repayable to the credit provider will include the amount of your loan plus all the interest and fees that have been added to the loan amount. The fees and interest you would ordinarily pay on a credit contract are regularly added to your reverse mortgage loan balance. Interest will be charged on the fees and interest that have been added to the loan (this is known as the capitalisation or compounding of interest and fees). Over time, the effect of compounding interest will build up the total amount you owe. The more you borrow, the longer you borrow it for and the higher your interest rate, the bigger and faster your debt will grow. This feature of reverse mortgages makes it very important that you only borrow enough funds to meet your existing requirements. It also means that a reverse mortgage is not a suitable product if your purpose for the funds is investment. Set-up fees and ongoing fees usually apply as well. You should ask your credit provider to detail all of the fees and whether the fees can be changed by the credit provider. You should also check whether your credit provider is able to introduce new fees and charges. 6 Can I make additional repayments? Unless your reverse mortgage credit contract says otherwise, the answer is yes Additional repayments will reduce the amount of interest that you will be charged. You should ask your credit provider whether you are able to make additional repayments.
Page 4 of 7 7 Can I pay out my reverse mortgage at any time? Yes. You will need to ask your credit provider how much you owe as at the date you want to pay out the loan. A credit provider may apply fees if you pay off the loan early. You should ask your credit provider if there are any fees for early repayment. 8 What if I owe more than the value of my home? If you entered into your reverse mortgage after [insert date that statutory protection against negative equity will come into effect], then even if you owe more than the value of your home, your credit provider is prohibited from recovering more than the net proceeds of sale of your home. However, you will not be entitled to this protection if you have: Acted fraudulently; Wilfully damaged your home; or Failed to obtain the permission of the credit provider before selling your home. [will insert paragraph explaining more about this once statutory protection against negative equity has been drafted] If you entered into your reverse mortgage before [insert date that statutory protection against negative equity will come into effect] then you should check your contract to see if it contains a "No Negative Equity Guarantee". You should also ensure you understand what the obligations are on you to ensure you obtain the protection of the guarantee. 9 Could I lose my home? This will depend on the terms and condition of your reverse mortgage credit contract. Normally, you will not have to repay your loan until you decide to do so or you (and any other named borrower) die or move out permanently.
Page 5 of 7 In some circumstances, however, if you do not meet the terms and conditions of the loan your credit provider may be entitled to begin enforcement action, which could include selling your home. You should read your reverse mortgage contract and ask your credit provider to identify the terms and conditions in the contract that, if breached by you, will entitle the credit provider to begin enforcement action (these are often referred to as the default conditions ). The contract should clearly and specifically spell out what you must do if you are in default. You should also get independent legal advice to ensure you understand the terms and conditions of your reverse mortgage contract before you sign. 10 What if I die before my partner (or another person living with me)? General If you are living with someone who is not also a borrower under your reverse mortgage credit contract, and you die, the loan will become repayable. Unless you have made other arrangements for repayment of the loan your credit provider will be entitled to sell the property and anyone else living in the property will have to move out. For this reason, if you are part of a couple it can be very important to take out a reverse mortgage in both names so that the loan is not repayable until the death of the second resident. Some reverse mortgage contracts protect the right of a resident who isn t the borrower to stay in the house after all borrowers have died. If this is what you need, make sure your reverse mortgage contract provides this. 11 Should I get advice before entering into a reverse mortgage? Yes. You should get independent financial advice from a financial adviser if you are considering a reverse mortgage. Things you should seek financial advice on include:
Page 6 of 7 Are there alternatives to a reverse mortgage that are more appropriate for you? These can include downsizing, accessing government loans or benefits, using savings or other investments. Is this the most appropriate reverse mortgage for you? You should consider the different payment and interest rate options available. Your needs and objectives, future plans and ongoing commitments will determine the product that is most suitable for you. What is the effect of a reverse mortgage on your tax position and entitlement to government benefits? You should get independent legal advice from a lawyer before signing any reverse mortgage loan documents. You should also make sure your reverse mortgage provider and anyone else you are dealing with are members of an Australian Securities and Investments Commission approved external dispute resolution scheme. 12 Could a reverse mortgage have an impact on my government pension? It could. You should contact Centrelink or get independent financial advice to confirm whether or not it will. 13 Could a reverse mortgage have an impact on my future options? A reverse mortgage may limit your options in the future. Consider your possible future needs and whether you will have enough money to finance a move to your choice of aged care or to a retirement village after repaying the reverse mortgage. A reverse mortgage taken out early on in retirement may limit the amount of money you have left to pay for a move to your choice of aged care or to a retirement village. Your reverse mortgage might be transferable to another property. If this is important to you, you should enquire about this feature.
Page 7 of 7 14 Will a reverse mortgage affect the inheritance of beneficiaries to my estate? Yes. A reverse mortgage will decrease the value of your estate. The value of your estate may be much less than anticipated because the debt increases over time due to unpaid interest and fees. In addition, if the value of your home diminishes during the course of the loan (perhaps because the market is falling) you or your estate may end up with less left over than you thought. Your reverse mortgage contract might allow you to protect a percentage of the future value of your home. When your home is sold to repay the loan, you or your estate will receive the protected percentage of your home s sale price plus any money left after the loan is repaid. However, this option may attract fees and may be subject to terms and conditions. It is a good idea to talk to the people who you are planning to leave the benefit of your home to before taking out a reverse mortgage. Reverse mortgages are not suited to homeowners who wish to leave the full value of their property to their beneficiaries. 15 How can I get further information about reverse mortgages? You can contact your Government Consumer Protection Agency or the Australian Securities and Investments Commission.