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The most common form of an Equity Release available to seniors in Australia is a lifetime mortgage (often referred to as a reverse mortgage).
Lifetime Mortgage
A lifetime mortgage is usually structured as a loan secured with a first mortgage on residential property. Unlike a traditional mortgage, no repayments are due until all borrowers permanently vacate the property (hence the term "lifetime mortgage"). This will usually be when all borrowers have passed away, moved into long term aged care, or the property has been sold, at which point the "Lender" will seek repayment of the funds owing.
Funds released via the loan can be taken as a single lump sum, a series of instalments or drawn down under a "line of credit" facility. The options available will vary with each Lender. Whilst Lenders will accept voluntary repayments, no regular repayments are required.
No Repayments
Because there are no repayments due whilst the borrowers are living in the property, interest and fees are added to the loan balance during this period. This is often referred to as the "capitalisation" or "compounding" of interest and fees to the loan balance. Interest will usually not be charged until funds have actually been advanced by the Lender to the borrower.
When the loan and all interest and fees are due for repayment, the borrowers or their estate will typically have the option of repaying the loan out in full and retaining the property, or selling the property and repaying the Lender from the proceeds of the sale.
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No Negative Equity Guarantee
A key feature and a requirement by SEQUAL of its members, is that the total loan balance repayable by the borrowers cannot exceed the net realisable value of the property at the time the loan is repaid. This is commonly referred to as a "No Negative Equity Guarantee". This means that provided the terms and conditions of the loan have been met, the Lender cannot seek additional repayment from the borrowers personally, or from their estate, if the value of the property is insufficient to fully repay the loan.
In addition, this guarantee ensures that all borrowers have the right to live in the property for as long as they choose, even in the event that the total loan balance exceeded the property value.
These are contractual obligations given by the Lender to you, the borrower, and will be subject to the terms and conditions detailed in the loan documentation. These will vary with each Lender, but SEQUAL requires its members to clearly state these terms and conditions in the loan documentation. You should ask your solicitor to go through these terms and conditions with you should you proceed with an Equity Release loan.
Loan Amount
The amount of money that you can borrow will vary with each Lender. It will usually be based on the age of the youngest borrower and the current market value of your property, together with the minimum and maximum loan amounts that each Lender allows. The maximum amount you can borrow will usually be expressed as a Loan to Value ratio (LVR) being the available loan amount as a proportion of your property’s appraised value. The LVR usually increases with age.
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Interest Rate
As with traditional mortgages, Lenders will offer their loan with a variable rate of interest, a fixed rate of interest or a combination of both. Again, the rates and options available will vary with each Lender.
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Loan Portability
Some Lenders offer a ‘portability’ option, which means that should you wish to move home, you can transfer the loan to the new property. There may be some conditions and fees attached to this option and, depending on the value of the new property, you may be required to repay a portion of the loan.
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Property Protection
Some Lenders offer the ability to protect a portion of the future realisable value of the property, in effect ensuring that a fixed percentage of this future property value will be available to you or your estate, irrespective of the loan balance at that time. Again this option may attract fees, and will be subject to terms and conditions.
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Terms and Conditions
All Lenders will make the loan available to you subject to a set of terms and conditions. This is an important document that you should read thoroughly, and seek advice on from your solicitor.
These may include, but not be limited to, requirements that you as the borrower will:
- adequately maintain the property
- maintain an adequate level of buildings insurance on the property
- notify the Lender if there has been change to the structure of the property
- notify the Lender if any additional permanent residents have moved into the property.
These are all designed to protect the Lender as first mortgagee and to protect the future realisable value of the property. Check with the Lender what their specific terms and conditions are.
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