1. What a reverse mortgage calculator is
A reverse mortgage lets a homeowner borrow money using the equity in the home as security, and equity means the value of the home less any money owing on the mortgage. Depending on age and lender policy, the amount borrowed can be taken as a regular income stream, a line of credit, a lump sum, or a combination of these. Lending criteria still apply.
A calculator of this kind projects debt and equity. Moneysmart says its calculator helps a person decide whether a reverse mortgage is right for them: it explores what a reverse mortgage could cost over different periods, such as 10 or 20 years, shows how home equity may change with different interest rate and home value assumptions, and prints the results.
An information sheet from ASIC describes the calculator on the Moneysmart website as projecting how a borrower's debt grows over time, what that may mean for the equity they hold in their home, and how shifting interest rates and home values could affect that equity. Taken together, the sheet calls these projections 'equity projections'.
2. How the calculator works
Moneysmart says a borrower stays in the home and is not required to make repayments while living there. Interest compounds, Moneysmart says, so the amount owed increases and adds to what was borrowed. The loan is repaid in full, including interest and fees, when the home is sold, when the borrower moves out, or when a deceased estate sells the home.
To use the calculator, a lender and product are chosen from a drop-down menu, and that choice applies the lender's borrowing limits, including its loan to value ratio, minimum borrower age and maximum loan amount. The default settings come from individual lenders and reflect the specific reverse mortgage products included, and they cannot be changed. Amounts calculated are estimates and not a prediction.
Age shapes who can use it. Most lenders set the minimum age for a reverse mortgage at 60, Moneysmart says, and the calculator is set so the youngest age that can be entered is 55. It works on a phone, but the volume of information displayed means a computer or tablet gives a better view of the results.
Interest compounds, Moneysmart says, so the amount owed increases and adds to what was borrowed.
3. The assumptions behind the numbers
The calculator assumes the value of the home is updated each year by the growth rate chosen. Constant growth is assumed, but Moneysmart advises a conservative estimate, because home values can stay flat or fall in the short term. The calculator treats interest rates as fixed for the loan's life, though rates may vary, so the lender is the one to check with. Unpaid fees are added to the loan, ongoing fees are assumed constant, and no repayments are made during the loan's life; a borrower who wants the option to make repayments is directed to the lender.
ASIC's information sheet sets out three scenarios it expects credit licensees to show a consumer: property value growing 3% a year with the default 7% interest rate, no growth in property value, and property value growth of 3% a year with interest rates 2% higher. The default time period for the projections is 15 years, and the sheet says a printed projection of each scenario must also be provided.
There is protection against owing more than the home is worth. For reverse mortgages taken out on or after 18 September 2012, negative equity protection applies, Moneysmart says, so the amount owed to the lender can never be more than the value of the home, and after a sale the lender must accept the proceeds as full settlement.
4. What people weigh up
Rates and conditions vary between reverse mortgage products. ASIC says a product can be added to the calculator when its lender has an Australian Credit Licence, or does not need one, and it is a reverse mortgage. ASIC states that inclusion is not an endorsement of the lender or of the product.
Moneysmart says a lender or broker has to use the calculator when working through reverse mortgage projections with a borrower, and that a copy of the results can be taken away, with questions asked about anything that is unclear. Results from the calculator are not advice about a financial product. Moneysmart suggests asking an independent professional, for example a licensed financial adviser, a lender or a mortgage broker, before a decision about a reverse mortgage is made.
Questions
- What is a reverse mortgage calculator?
- It is a tool that projects how a reverse mortgage could affect the equity in a home. Moneysmart's calculator explores what a reverse mortgage could cost over periods such as 10 or 20 years and shows how home equity may change under different interest rate and home value assumptions.
- How does the reverse mortgage calculator work?
- A lender and product are chosen from a drop-down menu, which applies that lender's borrowing limits, including its loan to value ratio, minimum borrower age and maximum loan amount. The calculator then projects debt and remaining equity over time and prints a report.
- Does the reverse mortgage calculator give financial advice?
- No. Moneysmart states that the results are not advice about a financial product, and suggests asking an independent professional, for example a licensed financial adviser, a lender or a mortgage broker, before a decision about a reverse mortgage is made.
- What age can be entered into the reverse mortgage calculator?
- The youngest age that can be entered is 55. Moneysmart says most lenders set the minimum age for a reverse mortgage at 60.
- What assumptions does the reverse mortgage calculator use?
- It assumes the home's value changes each year by the growth rate chosen, interest rates stay constant over the life of the loan, unpaid fees are added to the loan, and no repayments are made. ASIC's information sheet describes three scenarios it expects credit licensees to show, using 3% property growth, no property growth, and interest rates 2% higher.