Here are some of the misconceptions that just won’t die.
While superannuation and Age Pension entitlements provide a baseline of retirement income, for many seniors it’s not enough to live on. A Reverse Mortgage loan is an increasingly popular option for dealing with cost-of-living pressures.
But there are plenty of misconceptions out there about Reverse Mortgages (also known as senior’s home equity release loans).
So here are seven Reverse Mortgage myths (and the truths that lurk beneath the surface) so you’re more fully informed next time you consider unlocking your home equity.
Myth No. 1 – The bank will take the house
The Truth: No, you won’t lose your lovely home.
In fact, you can stay in your home as long as you want. Whilst the bank or lender takes a mortgage over the property, you remain the fully registered owner at all times.
As as long as you are not in material breach of the loan contract, the Reverse Mortgage lender cannot compel you to sell the property.
And because there is no need to make regular repayments, there is very little risk of default.
(The key obligations you need to observe under Reverse Mortgage terms and conditions include paying for annual home insurance, keeping the property in good condition, and staying up to date with council rates payments).
Myth No. 2 – Downsizing is better
The Truth: Many Australian seniors have spent most of their lives in their current home.
Aside from comfort, and a physical connection to the local community, a family home reminds us of happy memories with our family and friends.
Plus, the task of selling a home and moving can be physically and emotionally taxing. A home sale may also trigger hidden financial costs such as stamp duty and legal fees.
Also bear in mind that selling your home might affect your Age Pension entitlements under the Assets Test.
Myth No. 3 – You may end up owing more than the house is worth
The Truth: Reverse Mortgages are the most heavily regulated credit product in Australia. They are ‘non recourse’ loans, which means that the lender has no recourse to any other assets aside from the property used as security.
Some people considering a Reverse Mortgage loan may worry that the effect of compounding interest over time could result in them owing more than their property’s value.
However, this is not possible because there are legislated safeguards in place.
The negative equity guarantee clause in the National Consumer Credit Protection Act of 2012 provides assurance that at the end of your Reverse Mortgage loan, the bank cannot charge you more than your property value, regardless of what happens to the value of your home.
Myth No. 4 – I may have nothing left to fund aged care
The Truth: In a Reverse Mortgage loan, the amount you can convert to cash depends on the Loan to Value Ratio (LVR), which considers the value of your property and the age of the younger borrower (if you are borrowing as a couple).
LVR computations for home equity loans are conservative. In many cases, the LVR for a Seniors First Loan starts at 15% for someone aged 60 and could increase at least 1% per year thereafter.
So if a move into residential aged care beckons at some point in future, it’s likely (more often than not) that enough home equity remains to fund that.
In addition, brokers and lenders are required to investigate your possible aged care needs as part of the Reverse Mortgage application process.
Myth No. 5 – My kids will lose their inheritance
The Truth: Some over 60’s homeowners actually use a Reverse Mortgage to unlock home equity in order to provide financial assistance to their children, or grandchildren.
It’s not uncommon for retirees to release home equity via a Reverse Mortgage in order to help fund a property purchase for the adult children.
(Care should be taken with this to check it will not adversely impact Age Pension entitlements)
Alternatively, many lenders offer a feature called ‘Protected Equity’ that allows you to quarantine a portion of the home equity from the possible effect of long-term capital erosion.
If securing your family’s inheritance is a high priority, then formal retirement and estate planning advice from a qualified financial adviser may also help.
Myth No. 6 – A home equity loan is a last resort for retirement funding
The Truth: Home equity is a greater source of wealth than superannuation for most Australian seniors.
It is well known in public policy research that there is a significant long-term gap in the retirement savings of Australians. This is largely due to the fact that superannuation was only mandated in 1992, and that the superannuation guarantee (SG) has not yet reached the original recommended level of 12% required to achieve full retirement funding.
GIven this reality, Reverse Mortgage is increasingly a first choice for many homeowners over 60 years. It is one of the few financial products available that can fund a more comfortable lifestyle – all without the need to downsize.
Myth No. 7 – I am not qualified for a Reverse Mortgage because I still have a mortgage
The Truth: In many cases, the Senior First Reverse Mortgage broker team can refinance existing home loans.
If you are struggling to make the payments on an old mortgage remaining on your property, then it might be time to consider alternative solutions.
Remember, conventional principle and interest mortgages must be repaid monthly, which can drastically affect your cash flow in retirement.
With limited income and working opportunities, many seniors who are still paying down significant debt can find themselves under incredible financial stress – and may even risk default.
A Reverse Mortgage loan can be used for debt consolidation. It’s possible to refinance the old home loan, thereby removing the need for monthly loan repayments (the debt plus any interest or fees is ultimately repaid from the future sale of the property).
Avoid the myths and get the facts on Reverse Mortgage loans
Retirement is a crucial phase in life. So when it comes to finances, it’s important to identify misconceptions and to be fully informed. Generally, you can rely on licensed finance professionals for sound mortgage and credit assistance.
To help you learn more about Reverse Mortgage, you can download our FREE REVERSE MORTGAGE GUIDE.
You can also call Seniors First Finance at 1300 745 745 or post your comments below.
NOTE: This article is for informational purposes only and does not constitute financial or credit advice. All information presented here is of a general in nature and should be considered as such.