Understanding How Reverse Mortgages Work
At the FiftyUp Club, we encourage members to reach out to us and to each other when we’re faced with the same issues. I received the following email from member Helen (pictured):
"I had no savings for over 6yrs then sold my house and moved into a retirement unit so I could have some funds as I was sick of having nothing.
"Turns out this was not a wise move! It freed up my money and I was able to put money into Super before I turned the cut-off age of 65. I thought I would not be penalised for having super. Wrong yet again...
"To cut a long story short, I like so many others no longer qualify following the pension changes announced last January. So much for taking so many chances and working like a dog and being careful until retirement.
"Things change. What you once thought was a combined retirement fund becomes half when after 34yrs of marriage your significant other no longer wants to be married. All of a sudden the world and life changes. You again make right/wrong decisions but think you may have a back up plan after working all your adult life and paying your taxes unconditionally.
"MAJORLY WRONG AGAIN. IT SUCKS...
"Very best wishes. Helen"
It's vital to get advice, as there are so many pitfalls and options out there.
The tightening of the means testing for the aged pension has triggered a rise in demand for financial products such as reverse mortgages, home reversion and the aged care loans.
A recent article in the Australian Financial Review by Bina Brown explains how these products work.
With a reverse mortgage, borrowers use the equity in their home as security for a loan that can be taken as a lump sum, a regular income stream, a line of credit or a combination of these options.
With home reversion, a lump sum payment is paid by the provider in exchange for a fixed proportion of the future value of a person’s home.
The more recently developed aged care loan is specifically to fund the payment of the refundable accommodation deposit for entry into residential aged care which can be anywhere between $300,000 to $1 milion.
Reverse Mortgage Finance Solutions credit adviser Paul Dwyer told the AFR that reverse mortgages do not generally affect Centrelink entitlements. In one such case a Melbourne couple used most of their superannuation to complete the purchase of a new home valued at $2.9 million, then became eligible for the full age pension and obtained $60,000 equity release per year to meet their cost of living.
My mum took out a reverse mortgage on her property when I got married in 1995 to help pay for the wedding. She said this is what my father would have wanted had he survived brain cancer. She borrowed $5000 and by the time the house was sold in 2008 the debt increased to $8000 but the house value had doubled in that time. She was able to free up some cash and still realize a good profit when she sold.
With a reverse mortgage, no interest is payable until you move out of your home or sell it. However the interest compounds over time adding to your loan balance.
If the house value increases, then the loan can be repaid with little impact on the net equity which is what happened to mum.
If the house value decreases you can never owe more that a certain percentage of the value of your home and the bank cannot require you to repay more than the value of your home.
With less pension to rely on, it may be worth investigating how your home can help finance your retirement. It’s vital to get advice, as there are so many pitfalls and options.