Reverse mortgages…are they the answer to retirement financing?

Reverse mortgages might be being touted by financiers as the solution to your retirement funding, but are they all they look to be from the outside? And where are the traps?

They are meant to become all the rage as the population we have in our country ages, gives up daily work, and decides to draw on the equity in their home to create the life they’ve always dreamed of.  Let’s face it, whether you want to travel, get out and enjoy your retirement, or just afford your daily bills without working, but face the prospect of selling your biggest asset, your home to do so, things can look a little scary.   Perhaps the prospect is even a little to scary to take on… but for some time the reverse mortgage has been made out as  sweet enough to solve all the problems of a retiree with a paid-off home and no income.   But does it really?

A reverse mortgage allows you to borrow money using the equity in your home as security. The loan can be taken as a lump sum, a regular income stream, a line of credit or a combination of these options to suit your circumstances.  How much you can borrow depends largely on your age.  The older you are, the more you can borrow. But every lender is a bit different.

As a general guide, if you are 60 the maximum amount you can borrow is likely to be 15-20% of the value of your home. You can usually add 1% for each year older than 60. That means if you are 70, the maximum amount you could borrow would be about 25-30%.

While no income is required to qualify, credit providers all over our country are required by law to lend you money responsibly so  you will find that not everyone who has a home will qualify.  Interest on a reverse mortgage is charged like any other loan, except you don’t have to make repayments while you live in your home.  The interest compounds over time and is added to your loan balance. You remain the owner of your house and can stay in it for as long as you want.  The catch is, you, or your family, must repay the loan in full (including interest and fees) when you sell your home or die or, in most cases, if you move into aged care.  So you must properly understand what you are signing up for so your loved ones aren’t left with a big bill at the end, and only the paperwork of your home to deal with.

Reverse Mortgages are regulated by ASIC, who in 2012 brought in statutory ‘negative equity protection’ on all new reverse mortgage contracts. This means you cannot end up owing the lender more than your home is worth (the market value or equity).  This is a handy little bit of legislation that ensures your kids aren’t left with LESS than nothing.

Assumptions: $50,000 loan at age 60, no regular withdrawals, interest rate of 10% calculated and charged monthly, $1200 establishment fees, $9 monthly fees added to loan balance.  Example from ASIC website… 

But there are things to “watch out” for…

• The interest rates on reverse mortgages are usually higher than that on average home loans
• The debt can compound more quickly than you realise, so please make sure you understand the way debt compounds before you decide on a reverse mortgage
• The loan may have an effect on you ability to qualify for the pension
• The cost to break a fixed fee loan could be very high.  

Kerry in our community is considering taking a reverse mortgage and is very keen to hear from people who have done so, and those who have explored it and made discoveries of their own… Tell us today… Would you or have you considered a reverse mortgage?  

Disclaimer: The information provided is general in nature and does not constitute financial advice.  Please seek advice from a financial planner if you want insights specific to your circumstances.  The examples provided is sampled on the ASIC website.