OCBA - Advantages and disadvantages

Advantages and disadvantages

Before signing a contract for a reverse mortgage, carefully weigh up the advantages and disadvantages of this type of loan. It is important that you understand how it will affect your choices and your financial position in the long term. Independent advice from a financial advisor or solicitor is essential in helping you make an informed decision. You may also wish to talk to a trusted family member.

Advantages

You can continue to live in your own home and have cash for a worthwhile purpose such as repairs to the house, a new car, a holiday or as a supplement to your income.
You don't need to make any repayments on the loan while you live there.
Although the loan is usually taken as a lump sum, some lenders offer regular payments or a combination of both.

Disadvantages

The loan rate is often higher than the standard home loan rate.
Fees and interest charged on the loan (compound interest) will accrue throughout the term of the loan. It is highly probable that the amount you owe could double in less than 10 years and the lender may end up owning a large part of your house.
The value of your estate will be considerably reduced for those who will inherit your estate.
If you relocate (either by choice or necessity) the loan must be repaid at that time. This could limit your options, as you may be left with limited money after the sale of your house.
If you are the sole owner of the house and you relocate or die, anyone else who lives with you may not be able to stay in the home.
If you want to repay the entire loan early you may have to pay an early termination fee. These fees can be considerable.
The loan may affect on your eligibility for age pension payments from Centrelink.

Be wary of any financial institution that accepts an application without discussing these advantages and disadvantages or will not provide you with information.

Older consumers in the USA and the UK have actually lost their homes through similar schemes. Lenders in Australia have claimed they will cover the loss if the debt is eventually greater than the value of the house (Choice June 2004) but ensure you get this guarantee in writing.

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Advantages and disadvantages

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Advantages

Disadvantages