A reverse mortgage is a loan that is borrowed by seniors against the value they have in their home
. Reverse mortgages work in the opposite way to other mortgages in that your debt increases over time. This is because you do not pay it back until you move out of the house permanently, and the interest is added each month to the debt.
A reverse mortgage is only paid back when you move out to permanent nursing home care or die, at which time it is sold to pay the debt. The money from the reverse mortgage can be paid to you in one lump sum, or it can be paid in instalments over a period of time. While a reverse mortgage for seniors may seem the ideal way to get extra money, there are some drawbacks.
If a couple own the house jointly and one partner dies or leaves to go into a nursing home or hospital the remaining partner can stay in the home and the reverse mortgage does not need to be paid back. But if the home is only in one name and that partner dies, the house will have to be sold and the remaining partner will then have nowhere to live.
And if you use the value of your home there may not be enough left over to fund entry into a retirement village, if that is a possible future plan. And certainly there will not be much left as far as estate value goes. Another factor to consider is that if you receive a lump sum from a reverse mortgages you may not then be eligible for any Centrelink payments.
Another factor to consider is whether the sale of the house will cover the full amount of the loan. While there is a clause called the No Negative Equity Guarantee to prevent the lender suing you for the rest of the loan, it is often so limited as to provide no protection at all.