Property Finance Made Simple: How to get the loan you need for the house you want by Andrew Crossley

Author:Andrew Crossley
Language: eng
Format: epub
Publisher: Australian Property Advisory Group
Published: 2016-12-15T00:00:00+00:00

Figure 5.1

Reverse Mortgage

In some ways a reverse mortgage is similar to normal loan. There is a debt, and interest is charged on the debt. The main difference is that the interest does not need to be paid by way of normal repayments. Interest is accrued and added to the loan. Interest is charged on the interest and on fees and charges — the loan just gets bigger and bigger over time. These loans normally have to be paid at death or upon moving into aged care, for example, by selling the property.

Some lenders only offer this type of facility to a borrower over 70. Age does determine the loan-to-value ratio (LVR) as well. At 70-years-old for example, the LVR offered may not be more than 20%. It can increase 2% a year until age 75 then 1% a year beyond that. The older the borrower the higher the LVR, up to roughly 45%. The borrower can even be over 90-years-old and apply for one of these.

The reason why the LVR offered is higher as the person becomes older, is for a couple of reasons:

•Because the interest capitalises on the loan and generally does not need to be paid back until death or aged care, the property is sold in the process. If too much is borrowed against the property, at too early an age, the borrower may be unable to afford costs in the future, like medical expenses or moving into aged care.

•The older they are, the sooner they will die. So the less likely it is that the interest on the debt will compound to the point of being worth more than their home. By law, lenders must guarantee that when the property is sold, the borrower will not have to pay back more than what the property is worth (known as a ‘no negative equity guarantee’).

•These reverse mortgage loans are not widely promoted either, with the average loan being around 70K; interest rates are much higher, and the maximum loan amount can be up to 1 million, with no fixed loan term. It also reduces the equity in the property of course, so there could be little available for the kids.

Non-Conforming/Credit Impaired

This section is focused on people who cannot obtain a mortgage through a bank nor most other mainstream lenders. You may be surprised that this section relates to many more people than you might think. Specialist lenders offer competitive rates to the banks, at the same time as thinking laterally and offering finance on situations that banks would never consider. Of course, this is ‘in general’ — there are always exceptions.

Next are examples of credit impairment that banks will normally not touch, but where it is still reasonably easy to obtain finance. Some brokers are not dealing in this space and it’s important to go to a better broker that will not shop you around with the wrong lenders, incurring credit hits on your credit file.

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