Reverse Mortgages
 |
What are Reverse Mortgages? |
|
Does a Reverse Mortgage suit my situation? |
|
The Age Pension and Reverse Mortgages |
|
Could I end up owing more than the value of my home if interest rates rise? |
|
Using a Reverse Mortgage to pay for Aged Care fees |
|
Other considerations |
What
are Reverse Mortgages?
Reverse Mortgages are a type of loan whereby you can release
the equity in your home to convert to cash or income. They
can be suitable for some retirees who need extra money for
living expenses or lifestyle choices.
The lending institution lends you a portion of the house value but the interest and repayments are generally not paid until you leave the residence, sell the home, or pass away.
The borrower must be over age 60 and will be able to access between 10-45% of the value of the home and take the loan as a lump sum or in regular installments. They are sometimes referred to as Equity Release loans.
Does
a Reverse Mortgage suit my situation?
Reverse Mortgages are generally only available to those
over 60 years of age and are particularly useful for retirees
who are ‘asset rich and income poor’. This type
of loan allows them to tap into their biggest asset to supplement
living expenses.
Alternatively, a Reverse Mortgage can provide funding for lifestyle choices such as a much-needed car, holiday, a home renovation, or to fund an investment.
| Example 1 – Jo and Dale are both 65 and live in their home worth $400,000. They take out a $50,000 Reverse Mortgage as a lump sum so they are able to renovate their kitchen and buy a new car. Their loan is fixed at 8.25% for 15 years. Jo and Dale have two children and have considered that by using the equity in their home they are potentially diminishing their estate. However, as they have only borrowed a minimal proportion they believe that there will still be a considerable inheritance left over. The graph to the right shows what happens to the loan and the property value over time, assuming property growth of 5%pa. In their case, a Reverse Mortgage has worked in their favour and they are able to do the things they want to do now and still have a growing estate. |
I receive the Age Pension – can I take out a Reverse Mortgage? If you receive the Age Pension or Centrelink benefits, you are still able to access this kind of loan, however, caution is needed. Whether you take a Reverse Mortgage as a lump sum or as instalments and whether the money is spent straight away or put into other ‘deemed’ assets could have a significant impact on your Centrelink benefits.
| Example 2 – Marie is single, aged 70, and currently lives in her home worth $500,000. Her current income is $19,154pa, which includes $11,154 Age Pension and $8,000 employer superannuation (she also has a $10,000 car and $10,000 in savings). She is considering taking out a Reverse Mortgage so that she can invest in a managed fund – in turn creating extra income to meet her needs. She takes out a $120,000 lump sum, which is 24% of the value of her home, and invests in a managed fund earning her an extra $4,800 per year. However, as her ‘deemed income’ for Centrelink purposes has increased, her Age Pension payments are reduced by $2,182 – leaving her in a position not much better than where she started. Alternatively, Marie can release the same amount of equity from her home, but take it as periodic payments of $666.66 per month spread over 15 years*. As this type of receipt is not derived from a financial investment and is spent immediately, it is not accountable for Centrelink purposes. This means her Age Pension is safe and overall, her total income will increase by $8,000 to $27,154, helping meet her needs much more effectively.
|
IMPORTANT: If you receive Centrelink benefits, obtain professional advice from your Count adviser before considering a Reverse Mortgage.
Could I end up owing more than the value of my home if interest rates rise? In a worst case scenario, if the value of the home dropped and interest rates rose, there may not be enough equity to cover the loan plus the repayments when the borrower dies, or decides to sell.
A
few things to consider:
How do you feel about using some of the equity in your home
that would otherwise be left to your beneficiaries?
A Reverse Mortgage may not be the only option available to assist your retirement.
Will it limit further options of how the family home could be used? This is particularly relevant to those on Centrelink benefits who are planning to enter Aged Care facilities.
If you think this type of loan is suitable and you are over 60 years of age, speak to your Count adviser. They can assess your suitability and recommend an appropriate strategy to help you achieve your retirement goals.
Important note: in Western Australia, as outlined in the Finance Brokers Control Act (WA) 1975, your Count adviser can only provide Residential, Business Lending and Chattel mortgage finance if they hold an WA Finance Brokers Licence.
Count’s lending services are provided via Count’s subsidiary finconnect (australia) pty ltd, ABN 45 122 896 477. Head Office: Level 19, 1 Alfred St, Sydney 2000. Registered Finance Broker (ACT) #173 106 45. WA Finance Brokers Licence #4292.
 |
As at
9 April, 2008 Doc Owner: < > |
