Guide to equity access loans
Also known as reverse mortgages, equity access home loans allow you to borrow using the equity in your existing home, freeing up the cash that was tied up in bricks and mortar to use for other things. In general, lenders will not require you or your estate to make any repayments on the loan until you sell your house, move into care or die, and any interest charged is added to the balance of the loan.
Over time, the interest charges add up and can increase to such an extent that you now owe more than your home is worth. This is known as negative equity. Some lenders write a clause into the loan contract called a no negative equity guarantee, meaning that you will never have to repay any more than your house is worth. However, this guarantee generally has stringent conditions attached which must be adhered to, otherwise it becomes void.
Some lenders will allow you to protect a percentage of the value of the property, which can then not be used to repay the debt.
Who can apply for an equity access loan
In general, if you are over 60 and own your own home, then an equity access loan could be a viable option for you to free up cash.
Each lender is different but you may be able to borrow up to 40% of the value of your home, and the older you are, the more you can borrow. For joint applicants, it is the age of the youngest borrower which determines the maximum amount available .
Is an equity access loan right for me?
If you are of retirement age and own your own home, equity access home loans could be for you. Maybe you need extra cash for everyday living expenses or funding for a holiday or renovations.
A lack of income, coupled with your advancing years, makes traditional loans inaccessible. If you don't want to start selling off your assets to fund your financial needs then it could be worth your while to consider an equity access loan.
Let’s say Gwen* is 70 years old and decides to take out an equity access loan. Her home is worth $400,000 and she decides to borrow $100,000 against it. Taking her borrowed funds in regular instalments means she can supplement her pension and live comfortably. With an interest rate of 8.32%, after 5 years Gwen's estate now owes $154,000, however her house value has grown and is now worth $475,000.
When Gwen dies at the age of 80, her home is worth $564,000 and, if the interest rate remains at 8.32%, her estate owes her lender $234,000, leaving a substantial lump sum for her beneficiaries.
Recent advances in the home loan market have seen an emergence of equity products for younger people. Shared appreciation mortgages (SAMS) are designed to assist young people who have little or no deposit saved to buy their first home. SAMS allow the payment of little or no interest on the loan in return for a share of the capital gain in your home.
Costs and conditions of equity access loans
Some things to watch for include:
- Higher interest rates than standard home loans.
- Compound interest and no requirement to repay the loan until you sell or die can see your debt rise much more quickly than anticipated.
- Equity access loans sometimes have a fixed term meaning that it may be necessary to sell your house to cover the loan while you are still alive.
- The no negative equity guarantee can become burdensome in later life, especially if it requires you to maintain the house to a certain standard. If these conditions are not met the lender may have the right to evict you.
- As sole owner of your home, when you die, anyone living with you may be forced to leave.
- Your lender may also have the right to determine who lives in your home and whether you can lease, renovate or vacate. They can even refuse to allow people to live in it with you.
- Your pension eligibility could be affected.
- If you wish to move home your loan may not be portable.
Ensure you get financial and legal advice if necessary and always deal with professional lenders who have industry accreditation. Also, make sure that the loan product itself is written under the Uniform Consumer Credit Code (UCCC). Speak to Centrelink and, above all, discuss your decision with your family.
*This is a fictitious example to demonstrate how a reverse mortgage could work.