The end is asked about at the start
A reverse mortgage’s last years are part of the conversation before it begins. The law requires inquiries into what the borrower wants and needs for the future, among them whether aged care accommodation may be needed one day, and whether they would rather leave equity in the home to their estate. Because a reverse mortgage can affect eligibility for Centrelink payments, ASIC considers an inquiry into that eligibility an essential part of checking the loan.
Repaying before the end
Moneysmart says a borrower may be able to make voluntary repayments earlier, if they wish, and may be able to protect a portion of the home’s equity from being eroded by the loan. Why the timing matters is shown in how the balance grows.
A loan under the Home Equity Access Scheme can be repaid in part or in full at any time.
When the home is sold
Moneysmart says the whole loan, with its interest and fees, is repaid when the borrower sells the home, moves out of it, or when their deceased estate sells it.
Moneysmart says every reverse mortgage taken out from 18 September 2012 has negative equity protection: the borrower can’t end up owing the lender more than the home is worth. Under the National Credit Code, the protection takes effect when the lender is paid. If the amount owed is more than the home’s adjusted market value (its market value, worked out and adjusted under the regulations where they provide for it), and the lender receives at least that value, as a payment it accepts from the borrower or as the proceeds of its own sale of the home, the borrower’s obligations under the loan, and the mortgage, are discharged, and the lender must pay the borrower anything it received above that value. The Code makes exceptions: the protection does not apply if the borrower committed fraud, or made a misrepresentation, about the reverse mortgage, or in circumstances the regulations prescribe. That protection, and its limits, are in the no negative equity protection.
A loan taken out before 18 September 2012 may be different. For those, Moneysmart’s first step is to check the contract, and if it does not include negative equity protection, to talk to the lender or get independent advice.
Settling a Home Equity Access Scheme loan
Services Australia describes settling a scheme loan in full, and releasing its charge or caveat on the property, in these steps.
Start the settlement
Through a Centrelink online account, from the Home Equity Access Scheme Summary page. Someone unable to use online services can complete the scheme’s variation form or call the Centrelink older Australians line, which Services Australia lists on its repayment page.
Give 14 days’ notice
Services Australia must be told no less than 14 days before the agreed settlement date.
The payout amount
Once it knows the loan is to be settled, Services Australia can say how much will pay the loan out, and get ready to take the charge or caveat off the property.
A valuation, if needed
Services Australia may need to value the property before it is sold so it can apply the no negative equity guarantee correctly. The valuation is free.
The guarantee at settlement
The guarantee applies when the debt is settled: the borrower or their estate repays no more than the market value of the secured property, less any other mortgages or legitimate claims on it. The guarantee may not apply if the borrower increases a mortgage or encumbrance, misrepresents their circumstances or commits fraud, and then the full loan balance has to be repaid.
After a borrower’s death
For the government scheme, Services Australia says:
“If there’s an outstanding loan after your death, we’ll generally seek repayment from your estate after 14 weeks.”
“We may defer repayment if your surviving partner is both: Age Pension age or older; using the real estate used as security, for example, to live in.”
“If we defer your loan repayment, the loan will keep accruing interest.”
Services Australia, repay your loan under the Home Equity Access Scheme
The guarantee still applies as in the step above: what the estate repays is capped, unless one of its exceptions applies. The rest of the scheme is in the Home Equity Access Scheme.
Arrangements that end differently
Moneysmart sets two other ways of releasing home equity beside the reverse mortgage, and each ends in its own way.
Home sale proceeds sharing
Also called home reversion, this sells a share of the home’s future value while the owner lives there, for a lump sum, and the owner keeps the remaining share of the equity. It is not a loan, so there is no interest; Moneysmart says there is a fee for the transaction and the valuation, as a guide around $2,000. Its example: a $500,000 home, with a 20% share of its future value sold, for which a provider may offer $37,000 to $78,000 depending on the owner’s age. If the home sells for $800,000 twenty years later, the provider gets 20% of the price, $160,000, less any rebate.
Equity release agreement
This sells a portion of the home’s value for a lump sum or instalments. Where investors buy the equity through a property investment fund, fees are deducted from the owner’s remaining equity each time a periodic fee falls due, such as every five years, at a set percentage of the fund’s equity in the home. The fund’s fee varies with the owner’s circumstances and the agreement; in Moneysmart’s example, a fund charging an initial fee of $30,000 may take $130,000 of the owner’s equity to cover both the lump sum and the periodic fee. Moneysmart says the share of equity the owner keeps will reduce over time, and could go down to zero.