Mortgages are regulated under the National Consumer Credit Protection Act 2009 (Cth) and the National Credit Code (NCC). There are some special regulations for reverse mortgages.

Reverse mortgages

A reverse mortgage is where the borrower’s total liability under the credit contract or mortgage may exceed the maximum amount of credit that may be provided under the contract, with no requirement to reduce the amount owing [NCC s 13A]. There may be other conditions prescribed by regulation.

In other words, a reverse mortgage allows a borrower to access the equity on his or her own property (secured by a mortgage), without being required to make any repayments on the debt whilst still living in the home.

Depending on the terms of the credit contract, the debt usually becomes repayable (with interest) once the property is sold, either because the borrower dies or moves into other accommodation.

Even though no repayments are required during the life of the reverse mortgage, lenders are required to comply with the responsible lending regime set out in Chapter 3 of the NCCPA. This includes an assessment as to whether or not the reverse mortgage suits the needs and objectives of the borrower.

In addition, prior to undertaking any assessment as to whether or not the loan is unsuitable, the lender must give the borrower certain information, as follows:

Borrowers are also protected against negative equity, which means that the amount repayable to the lender will never exceed the market value of the property (at the time the property is sold) [NCC ss 86A – 86F].

The interests of a non-title holding resident may be protected in the credit contract. This means that a person who is not an owner of the property can, if nominated by the borrower, remain in the property once the borrower leaves. If the credit contract does not have this provision, the credit provider must give the borrower a notice to that effect prior to entry into the contract [NCC s 18B].

The NCC does not require a person to seek independent legal advice before entry into a reverse mortgage. However, the Regulations may require it, and it is highly recommended given the complexity of reverse mortgages. Members of the Senior Australian Equity Release Association (SEQUAL) subscribe to a Code of Conduct that requires lenders to ensure that prospective borrowers to obtain legal advice first. In addition, borrowers also need to check with the Financial Information Service of the Department of Human Services to see how entering into a reverse mortgage might affect benefits received from Centrelink.

More information can be found on ASIC’s Moneysmart website.