In Financial planning on Friday 25th Sep, 2020

Worried about retiring with a mortgage? There’s a new refinancing option

Sep 25, 2020
Knowing you own that familiar place you call home can bring real comfort, especially when paying the mortgage is no longer a worry.

Most retirement ‘experts’ will tell you that you should be debt-free in retirement. Not only should your home be paid off, but you should have a decent superannuation balance, plus a and handy stash of emergency cash outside super.

Unfortunately, as the saying goes, life’s what happens when you’re busy making other plans. In the real world, preparing for retirement doesn’t go perfectly for everyone – and certainly not right now, when financial and job markets are still reeling from Covid-19.

In fact, 16 per cent of the 55-64-year-olds who own listed investments expect to live on a lower income after their assets took a hit during the recent market downturn. And almost 40 per cent of retiree investors are sweating over the sustainability of dividends, having seen their incomes slide as ASX stalwarts cut, postponed or scrapped their payments to shareholders over the past few months.

Meanwhile, up to 30 per cent – or 400,000 – of the Aussie who lost their jobs or suffered cuts to their hours during Covid-19 are aged 51-65. They’re less likely than younger job-seekers to find new roles so are stuck – too young to retire but too old for the workforce – with the prospect of spending years on JobSeeker before they can access the Age Pension or their super.

Whether you’re among the investors worried about a lower income or one of the workers facing an early retirement you can’t afford, it might seem there’s little help out there for you right now. That can be an even scarier prospect if your biggest regular expense is your mortgage, and even more so if you’ve been on a ‘mortgage holiday’ with your bank but fear that this repayment relief may soon come to an end.

Retiring with a mortgage? You’re not alone

There are several good reasons more Australians are retiring with a mortgage than ever before, none of them to do with bad money management. The fact that we’re purchasing our first homes later in life than we used to, property prices have long outstripped wage growth and the increase in divorce numbers mean that many people restart on the bottom rung on the property ladder – more than once if they’re especially unlucky in love! – are just a few of them.

Now, with super balances flat or lower as a result of Covid-19, even older Australians fortunate enough to have built up a decent savings pot may be reluctant to take a lump sum at retirement in order to pay off their mortgage. (You can read more here about why taking a lump sum from super while stockmarkets are recovering can impact the longevity of your super.)

If this sounds like you, how will you continue to repay your mortgage when you retire? You could talk to your lender about renegotiating your home loan but although interest rates are at record lows, banks’ lending criteria are currently very tight – and not friendly to wannabe borrowers nearing or in retirement.

What you might be surprised to learn is that your home itself may hold a better solution to your mortgage concerns.

By accessing the equity you’ve build up over years of home ownership, you could repay your mortgage in full by replacing your current lender with Household Capital. That way, you can free up your cash flow to improve your retirement lifestyle.

The Household Loan as a mortgage solution

A Household Loan is a reverse mortgage offered by Household Capital, an innovative Australian company that specialises in helping retirees access the savings locked up in their home to improve their standard of living in retirement – without losing ownership of their property.

A Household Loan lets you use your property as security against a loan that doesn’t have to be repaid until you sell the property (although you can pay off the loan at any time with no penalty).

Your loan can be paid as a lump sum called a Household Loan or as a Home Income of fortnightly or monthly instalments, or both. If you have an existing mortgage, a Household Loan can be used to repay it, so freeing up the money you would’ve otherwise used to make mortgage repayments. That way you keep living in your home and increase the funds you have to enjoy a more comfortable retirement lifestyle.

Household Capital CEO Josh Funder explains the key advantage a Household Loan offers over a regular mortgage.

“If you miss a payment on a traditional bank mortgage, there’s a very real risk of default,” Funder says. “That isn’t possible with a Household Loan. Because there’s no need for repayments, retirees don’t have to stress about potentially losing their home. Plus, rather than using their retirement income to make repayments, that income can be used for living.”

As an added upside, some older mortgagees even find that at 5.15 per cent, the variable interest rate on a Household Loan isn’t just lower than the rates offered by reverse mortgage competitors, it’s actually lower than their mortgage interest rate!

But can’t I lose my home with a reverse mortgage?

In past decades, reverse mortgages were promoted as a way for older Australians to access capital, but those promotions sometimes failed to encourage borrowers to consider whether such a loan was the right solution for their circumstances. That history has made some people nervous about reverse mortgages as a financial product.

But in 2012, the government updated the National Consumer Credit Protection Act to provide strong protections for borrowers who use a reverse mortgage to access their home equity.

“You remain the owner of your home, the title remains in your name and you have guaranteed lifetime occupancy,” Funder says. “This gives you security, as well as 100 per cent exposure to any growth (or loss) in the value of your property into the future.”

The legislation ensures that as long as you’ve stuck to your side of the reverse mortgage bargain – such as meeting your responsibilities to pay the rates on the property and keep it insured and well-maintained – your reverse mortgage provider can’t force you to sell your home. Nor can you ever end up owing more than your property’s worth.

If you’d like to see how a Household Loan or Home Income could help you manage your mortgage or improve your income in retirement, Household Capital has a free, online calculator that can show you not just how much you can borrow but how the equity in your property may increase over time and what proportion of your home ownership you’ll retain after borrowing.

HOUSEHOLD CAPITAL INFO Applications for credit are subject to eligibility and lending criteria. Fees and charges are payable and terms and conditions apply (available upon request). Household Capital Pty Limited is a credit representative (512757) of Mortgage Direct Pty Limited ACN 075 721 434, Australian Credit Licence 391876. HOUSEHOLD CAPITAL, the Star Device and Household Capital and the Star Device are trademarks of Household Capital Pty Ltd.
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.

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