Are you worried about your retirement? Perhaps you are concerned your savings will not be enough to cover your lifestyle when you retire. Is a reverse mortgage the solution for you?
I was recently quoted in a very extensive article by the Financial Review on reverse mortgages, which I recommend you read in full. It’s fair to say that although there was some bad press about reverse mortgage a decade ago, tighter rules and more product options have made reverse mortgage finance very safe & increasingly popular among Australian retirees. Today, the stigma that was once attached to reverse mortgages has all but disappeared and it is considered as a legitimate option for funding one’s retirement.
Around seven million people are expected to begin living off through their savings in the next 40 years. Most of these savings are in the form of superannuation. There is nothing wrong with that, but the challenge comes when we start to talk about how can we make your super last, especially during times of volatile investment markets and low yield. If you are retired or coming up to retirement age, it is important that you are aware of the options available to you, and the pros and cons of each.
Unlocking the equity in your home
The increasing need for viable ways to fund retirement has prompted financial institutions to offer equity release products such as reverse mortgages and home reversion products. Because of recent data statistics that show increase in longevity and number of retirees in Australia, property and investments have been receiving lot of interest as a way to fill the gap. Though selling the home is the most popular way to release equity in your home, there are products like reverse mortgage and home reversion that are worth considering.
Through a reverse mortgage, you can borrow money using your home as a collateral. You have an option to take the loan as a lump sum, a line of credit, a regular income stream, or combination of these options. One of the advantages of a reverse mortgage is it doesn’t require a specific income to qualify, unlike other loans. You also don’t need to make repayments while you are still living in your home. You can stay at your home for as long as you want and the only downside is that interest compounds over time. The loan must be paid in full once you sell your home, move to an aged care, or when you die.
What are the risks?
The question whether a reverse mortgage is safe is one of the most common question we receive from clients. With increased scrutiny from government, since 2011 regulations that protect consumers are now tighter for reverse mortgages. There are also bank-imposed limits on how much you can borrow against the home value. The government also imposed a ‘non-recourse loan contract’, which means the lender cannot touch your other assets in the event of default. All reverse mortgage lenders are required by law to provide a ‘no negative equity guarantee’, which means you can never be liable for a debt more than the value of your home. That means that even if the interest accumulates as you live longer, the lender cannot charge you more than your house is worth.
How about home reversion product?
A home reversion product allows you to sell a portion of your home at a discount, in exchange for a cash payment & continued residency in the house. By doing this, you can continue to live in your home and be a co-owner for the rest of your life. You will receive a lump sum and although there is no accumulating ‘debt’ to worry about, although you will generally receive a lesser percentage of the future sale value, the longer you live. It is also does not usually offer any flexibility in how you access the funds, and large lump sums may adversely affect aged pension entitlements. Nevertheless, a home reversion product can be a good way to extinguish significant remaining home loan debt upon retirement, that you could only otherwise clear through a property sale.
Should you consider a reverse mortgage?
Just like other loans, there are some things you need to consider before you decide to take out a reverse mortgage. Below are some points you need to know and decide on before applying for a reverse mortgage:
- Make sure you can live with less equity in your home over the long-term, and possibly less wealth for your children when you pass away or the property is eventually sold.
- There’s a price to pay—an application fee and interest rates that are usually one to two percentage points higher than regular home loans.
- Interest adds up over time and the equity in your home decreases as the balance of the loan increases.
- Some lenders require that the loan has to be repaid once you move out of the house, e.g. entering residential aged care. At this point, you have to think who else is living in the house before you can consider an eventual sale.
- You must be at least 60 years old to access a reverse mortgage. Some reverse mortgage lenders require that you are 70. Your loan amount will depend on the value of your property and your age. The older you are, the more money you can borrow.
Use our reverse mortgage calculator to see understand the long term costs and interest calculations of reverse mortgages.
Where can I use my reverse mortgage?
According to the industry body SEQUAL the average loan amount of a reverse mortgage is around $85,000. If you are old, unemployed, and have little source of income, there are many things you can use it for. Below are the common uses of a reverse mortgage:
- Additional source of income – Losing a job has a large impact on your cash flow. If you can’t rely on savings alone, reverse mortgage can come to the rescue.
- Paying for debts – Lessen your worries by paying your existing loans with the money you get from reverse mortgage.
- Fund your aged care – Entering a residential aged care can be costly. You can use reverse mortgage to fund your RAD (Refundable Accommodation Deposit).
- For home improvements – You can effectively use the money for the renovation or improvements you have been planning for your home.
- For lifestyle purposes – Most reverse mortgage loans by young and active retirees are used for lifestyle purposes like buying a new car or traveling.
Where will I go to get a reverse mortgage?
There are a small but growing number of existing reverse mortgage product providers in Australia. Seniors First is a long-time reverse mortgage broker and although we have seen the competition becoming better compared to recent years, there is still more to expect in the equity release market.
Each year, more than 200,000 people turn 65 with an average superannuation of $85,000. A product like reverse mortgage is an attractive retirement funding solution for many retirees.
Will it affect my age pension?
Reverse mortgage is flexible. Payments can either be a regular income stream, a lump sum, a line of credit, or combination of these options. In most cases, although there is no direct impact on the age pension, you still need to be careful. This is for in such cases as taking lump sums and using them for non-exempt assets like taking a holiday or general expenses.
High amounts of payments count as an asset immediately, while any lump sum amounting to $40,000 is not counted for the first 90 days. If you are a single person and a home owner, you can have as much as $200,000 in assessable assets before assets test affects your pension.
In case you use the money for investment, it may be subject to deeming right away. This may affect the pension through income test. But once you use your money for exempt asset, this may not have any impact on your aged pension.
Do I need a reverse mortgage broker?
A reverse mortgage broker helps you access to more lender choice and compare different lenders. A broker will help you find the right loan product, at a good rate. He or she can also give you tips to save money by showing you ways to structure and manage your reverse mortgage fund to minimise interest costs and effectively preserve your home equity. A broker will do all the hard work for you and manage your application from start to finish so you can have a hassle free reverse mortgage loan.
Seniors First’s brokers have full accreditation with panel lenders and successfully completed SEQUAL industry course, Equity Release Plans. They have extensive life experience, empathy, and understanding of your needs. For more information, call us now at 1300 745 745.
NOTE: this post is for informational purposes only and does not constitute legal or financial advice. Please also note that the figures contained are correct at time of publication, but may not be accurate in future. For possible reverse mortgage impacts on aged pension you should check with the Centrelink Financial Information Services (FIS).