Unpacking the Differences Between a Reverse Mortgage and Refinancing

How you can unlock equity in your home and how the two options compare to each other.

Taking out a reverse mortgage or refinancing your property are two of the ways you can unlock the equity in your home. Here’s how these two options compare to each other.

What is a reverse mortgage?

A reverse mortgage allows you to borrow money using the equity in your home as collateral.  Because they’re only available to homeowners aged 60 or over, they allow retirees to release some of the equity in their property. These funds can be used for:

  • Living costs
  • Medical expenses
  • Home maintenance

The best part? You can continue to live in your own home without having to make repayments to your lender. Reverse mortgages aren’t offered by all lenders and it’s often a good idea to get independent advice from a financial advisor or legal professional before accessing a reverse mortgage.  

How does a reverse mortgage work?

Unlike regular home loans where a homeowner makes repayments to a lender, in the case of a reverse mortgage, the lender instead makes payments to the homeowner. Depending on your age and your lender's policies, you can access the amount you take from your home loan as a:

  • Regular income stream,
  • Line of credit,
  • Lump sum, or  
  • A combination of all three of these options.

The amount of equity that you can access depends on several factors, including your age, property value and other approval criteria. Reverse mortgages generally allow you to access more equity as you age.  

When it comes to reverse mortgages, the interest charged on the loan compounds over time. This increases the amount owing on the mortgage and decreases the amount of equity in the property. In most cases, the interest rate charged on a reverse mortgage is higher than that of a standard home loan.  

While the homeowner doesn’t have to make any repayments while they live in the property, the loan must be repaid in full if:

  • The owner moves,
  • The owner sells the property, or
  • The deceased estate sells the property.

If you took out a reverse mortgage after the 18th of September 2012, you’ll be covered by negative equity protection. That means that you can’t end up owing the lender more than the value of your home.  

What is refinancing?

On the other hand, refinancing involves taking out a new home loan to replace your existing mortgage - this can be with the same lender or with a completely different lender. While refinancing can allow homeowners to access a number of different benefits, from lower interest rates to debt consolidation, one of the main drawcards of refinancing is the opportunity to access the equity in your home.  

Unlike a reverse mortgage where the homeowner doesn’t have to make repayments while they’re living in the property, you’ll still need to make regular repayments after you refinance your property. Learn more about refinancing and if it’s right for you here.

If you’re looking to refinance to access cash, this is called a cash out refinance. Learn more about cash out refinance and how it works here.

Reverse mortgage vs. refinancing - which is better?

A reverse mortgage and refinancing are two different ways to access the equity in your home. Whether one option is better than the other really depends on your individual financial circumstances, goals and needs.  

A cash out refinance may allow you to access the equity in your home while benefiting from a lower interest rate. This can be a great option for homeowners who have a steady income stream and can comfortably afford to continue to make repayments towards their home loan.  

On the other hand, reverse mortgages don’t require any repayments while the owner is living in the home, which is why they’re often preferred by retirees looking to access cash without having to make immediate repayments.

While doing your own research is important, it’s also a good idea to consult with a financial advisor or legal professional to help you evaluate your options.  

The article does not have regard for the financial situation or needs of any reader and must not be relied upon as financial product advice. As this information has been prepared without considering your objectives, financial situation or needs, you should, before acting on this, consider the appropriateness to your circumstances.

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