Reverse mortgage calculators: How-to guides

Hi, I’m Kate from SuperGuide. Welcome to our walkthrough of the Moneysmart Reverse mortgage calculator.

This free tool provided by ASIC is a great place to start if you’re considering a reverse mortgage as part of your retirement plan. It can help you to decide if a reverse mortgage is right for you based on the amount you intend to borrow and how that would affect the equity you have in your home.

To begin, we just scroll down. The first thing that we can select is the lender and the product that we’re going to be using. If you’re just thinking about a reverse mortgage and you haven’t chosen a lender, it’s okay to leave this blank. The tool will just use some default assumptions instead. But if you have chosen a lender, it’s valuable to put them in here because the tool will then tailor the results to that particular lender’s rules, including the maximum amount that they will lend you and the maximum loan to valuation ratio that they will offer you. This ratio is the percentage of your home’s value that the lender will provide to you.

For IMB, it’s saying that the maximum loan to valuation ratio is 14%. That means they would loan you 14% of the value of your home. That’s probably the ratio that applies for the youngest borrowers. Generally, the older you are, the higher the loan to valuation ratio they will offer you. The calculator will tailor that for us later based on the age that we put in.

If we continue down, the next section is about your personal circumstances. These first three Yes or No questions don’t affect the output that the calculator will give you, but they do tell you important information that you’d need to take into account before taking out a reverse mortgage if any of these circumstances apply to you. We’re just going to choose No for all of them. But if any of them do apply to you, do select Yes and have a read of the information that pops up there so that you’re aware of it before you go ahead and take out a loan.

Then we can select this box that tells ASIC that we understand they’re not endorsing any particular reverse mortgage product. We can go ahead and get started with the body of the calculator. Here you can put in your name. That doesn’t really matter. We’ll just put John, and the age of the youngest borrower. So if there’s the two of you, a couple, that’s quite common, you would put in whichever of you is younger. Of course, if it’s just you, then this would be your age. I’ll put in someone who’s 75.

Then you need to insert your current property value. Now, this is a good time to show you, if ever you’re unsure when you’re using the calculator, if you see one of these blue question marks, you can hover your mouse over there to get more information. If we do that in this box, it shows us that we need to estimate the current value of the home or contact a local real estate agent. So if you’re not sure of the value of your home, you can have a real estate agent come to have a look around and give you a valuation. And that is a free service that they offer. So we can put in here $800,000, say, as the value of the home.

The tool will then estimate how that property will grow in value over the coming years as part of its calculations. It assumes a growth rate of 3% if you don’t make a change. But if you feel that your property is not going to grow by that much, you can change it to be a lower value. Or perhaps if you think the value of your property is going to grow faster than that, if the property market around you is particularly strong, you could increase that. This is flexible, but I’ll leave it at 3% for our example.

Then we need to click the Next button. Here is where we get to the details of what you would actually like to borrow. It shows us here that based on the IMB Rank Reverse mortgage we have selected, the maximum loan amount would be $184,000, which is 23% of the house’s current value. The minimum loan amount is $20,000, so we need to borrow at least that much.

Now you can choose whether you’d like to borrow a lump sum of money or whether you want to receive regular payments from your loan. That will depend on what your needs are. You would select lump sum if you have a large lump sum expense that you need to fund. Perhaps your home requires significant repairs or you need a new car, for example.

Conversely, if you don’t have any immediate needs, but you’re just finding it difficult to get by day by day and you’d like some extra income coming in, then you would choose the regular payments option. If you’ve got both going on, you can even choose a combination of lump sum and regular payments at the same time, and the calculator can do all of those things.

The first thing I’d like to show you is if you take a lump sum. Let’s put in, say, $40,000 is the lump sum that we’d like to borrow paid to us in zero years and zero months, so straight away. Now, we might like to receive another lump sum later. Perhaps we require another $40,000 in another four years’ time. You can put that in there, and you can actually put in up to five lump sums, you can see. Now that shows us we’ve taken two lump sums of $40,000 for a total of $80,000, which is below our maximum loan of $184,000, so it’s okay to go ahead and proceed.

Now we’ll click Next. You can see now it moves on to the costs of the loan. What’s the interest rate, establishment fee, and so on. Again, if you haven’t chosen a lender, you can just leave these values as the defaults that pop up in the calculator. If you have chosen a lender, then you can go ahead and tailor each of these to what the lender is actually going to charge you.

I’ll leave the interest rate at 7% and put in a $495 establishment fee. That’s quite typical. I’ll leave the ongoing fees at zero. It is usually relatively easy to find a lender that won’t charge you a regular monthly fee. Then we can click Next.

Now you can see we’ve finally reached the results section of the calculator, but this is not the end. The results here are already quite comprehensive, but we can move the numbers around to get even more information about the potential outcomes if you go ahead with this reverse mortgage. Initially, the calculator is showing you that in 15 years’ time, when you’re 90, you’re estimated to own 84% of your home. You can see that the value is predicted to have grown to just over $1.2 million from the $800,000 that the home is currently worth. You’ll owe just over $200,000 to the lender of the $80,000 that you borrowed, plus the interest that that’s accumulated.

Now, what’s really great about this calculator is that it allows you to stress test the result. So if you click this What happens if box, it can show you how the outcome would change if things don’t go quite to plan. So first of all, it shows you if the interest rate is 2% higher than you predicted, then you’ll own 79% of your home equity when you’re 90 instead of 84%. You can change that here to say, Well, what if the property doesn’t grow in value? Then you would own 75% of your home, and the bank would own the other 25%.

You can also vary these figures on your own. So you can put in, Well, what if the property only grows at 1% and I end up paying 8% interest, then what would happen? It will change the results there for you. That’s a very good feature.

What you can also do is advance your age. It’s showing you what will happen when you’re 90 by default. But if you’re concerned about what happens after that, you can increase your age. What if you’re 100 and you’re still living in the home? Then what will happen?

You can see the calculator is dynamic. It changes the results immediately based on your change to that age and says in 25 years’ time, if everything goes to plan, you’ll own 76% of your home, and if it only grows at 1% with an 8% interest rate, then you’d own 50% of your home. This is really where you can spend a lot of time with the calculator, playing with different values to set your mind at rest about what could happen under different scenarios in future.

Once you’re happy with what you’ve got to look at there, you can continue down and click this button to show the details, and it shows you more information about what this picture will look like in 25 years based on if everything goes to plan versus your comparison that you’ve put in.

Now, the last thing we can do here is click View Summary. This gives you a really great dashboard of all the input that you’ve put in about how much you want to borrow, what your home is worth, and so on, and what your results are going to look like in the future. Right now, in five years, in 10 years, in 15 years.

Again, this is tailorable. So if you’d rather see a different period of years in any of these boxes, you can change them. Say you’d rather see what will happen in 15 years, and in 20 years, and in 25 years, because you’re more of a forward-looking person. You can change those figures and your dashboard will update itself for you.

Once you’re happy with this, you can go ahead and print your results if you would like to. There’s a lot of information on this page. It’s a lot to take in, so printing it to have another look at it later can be really sensible. Also, a lot of this allows you to show it to other people who would be interested, your partner who lives with you in the home, perhaps your children, to help them to understand as well what the impact of this reverse mortgage might be. Now, this is if we’re borrowing lump sums.

I’d like to show you the difference if you borrow regular payments instead. So if we go back to our results here, we can scroll up in the calculator and make changes. You can do this as many times as you like to test different scenarios about what you might borrow.

I’m going to take these lump sums out and say, We’re not going to borrow any lump sum at all. Instead, we’re going to borrow regular payments. Let’s say we’re struggling with the cost of living and we’d really like an additional $600 a month for the next 20 years until we’re 95 to live on. That’s going to be regular payments of $144,000. That’s borrowing more than under our original scenario, but over a longer period of time, so in small monthly payments, rather than two lump sums of $40,000 upfront.

If we click Next, we can see how that impacts the results. I’m going to leave this all the same. You can see that these numbers here look relatively similar to what they did before. At age 100, you’re expected to own 73% of your home equity, even though you’ve borrowed significantly more. And that’s because you didn’t borrow all the money upfront. You borrowed it slowly over a period of time.

So it is very important to take into account how you’ll be borrowing your money, how that may affect your home equity in future, and also how it may affect your Age Pension payments. If you take a lump sum and don’t spend it immediately, it would be assessed as an asset while you have it in your bank account, and that may reduce your Age Pension depending on your circumstances.

If you take regular payments and you spend them on your living costs, then that income is not accessible in any way by Centrelink because it doesn’t accumulate in your bank account. It’s not an asset, and therefore it can’t affect your Age Pension payments as long as you’re spending that money. These are things that are always important to consider along with the output from the calculator. You can always speak to Centrelink through their Financial Information Service, or of course, speak to a financial advisor about your particular circumstances before you go ahead with a loan.

Those are all the features that I wanted to show you. I hope that if you are considering a reverse mortgage, you go ahead and make use of this excellent free calculator that’s been provided by ASIC to understand if that could be right for you.