Can you lose your home with a Reverse Mortgage?
Over the years I’ve seen and heard so many misleading statements about the risks of Reverse Mortgages and warning borrowers to be very cautious and suspicious. It’s a wise thing to be cautious because it’s a significant decision to put your home up as security for a loan. It really gets down to finding out the facts for yourself and then making an informed decision. You’ll probably be very surprised with what you learn.
What isn’t commonly known is that the lenders accept the financial risks; not the borrowers or their family. As long as the borrowers abide by some simple rules including maintaining the upkeep of their home, having the Council rates paid up to date and making sure their property is insured, there’s no chance of a lender foreclosing on a Reverse Mortgage loan contract. For example, if over time the loan were to end up more than the value of the home, the lender can not force the borrowers to vacate or sell their property. Borrowers are protected by a ‘No Negative Equity Guarantee’ which all lenders provide as a standard feature of their loan contracts.
Can you borrow too much with a Reverse Mortgage?
Compared to ordinary home loans where you can borrow up to 100% of the property value, the amount you’re able to borrow with a Reverse Mortgage is far more conservative especially if you’re a borrower in your 60’s. Generally, the older you are, the more you’re able to borrow. The reasoning behind this is that older people have shorter life expectancies so they’ll be borrowing for a shorter loan term. Because all lenders provide a ‘No Negative Equity Guarantee’ on their loan contracts, they restrict the maximum amount they’re willing to lend. This guarantee means the lender accepts the financial risks if the outstanding loan becomes greater than the value of the property. For this to occur, the loan would need to be in place for many years. Believe me, the last thing a bank wants is to lose money so understandably they’ll be very careful with the amount they’ll lend. The maximum loan amount is based on a formulae that considers the age of the borrowers and home value.
How does a Reverse Mortgage differ from an ordinary home loan?
A traditional home loan is where there’s a contracted commitment to make regular loan repayments and the debt generally reduces over the loan term such as 25 years. A Reverse Mortgage is the exact opposite to a home loan. There are no regular loan repayments needed and for this reason, the loan balance increases because interest and costs are added to the loan balance. Also it’s much easier to default under an ordinary home loan compared to a Reverse Mortgage. Reverse Mortgage loans are also only available to people who own their homes and are at least 60 years of age.
The Importance of Power of Attorney agreements and Reverse Mortgages
When arranging a Reverse Mortgage loan it’s very important to make sure that there are Power of Attorney agreements in place protecting the borrowers. Sadly this isn’t a legal requirement but is vitally important especially once you understand the reasons behind this.
While it’s true that if you have a jointly owned asset such as a home then on the death of one person the home ownership legally remains with the other property owner. The remaining title holder is free to do as they wish with the property. The situation, however, is quite different where one of the joint owners is living but incapacitated. Powers of Attorney agreements are vital in such situations because legally nothing can be done with the home without the incapacitated person’s consent. The other joint owner can not make decisions on the home without gaining approval from the Guardianship Board of SA who legally takes responsibility of the incapacitated person’s financial and legal affairs and acts in their best interests. Just imagine how distressing and frustrating this would be knowing that you’d need to consult and get approval from a Government body to do anything including selling.
I’ve come across a situation where there was a Reverse Mortgage in place and the joint title holder couldn’t transact on the loan because there wasn’t a Power of Attorney agreement in place. Legally the lender requires both joint tile owners to sign on documentation or have a Power of Attorney sign on the incapacitated person’s behalf.