William and Amelia are retirees who are proud homeowners of a lovely bungalow in Surry Hills, Sydney*.
They bought the house in 1975 for only $127,000 and thanks to the property boom, the home is worth approximately $700,000 today.
The couple has been retired for more than a decade and relied on their pension as their main source of income.
With a passion for cooking, William opened a small restaurant while Amelia offered piano lessons for kids.
But Covid-19 disrupted their side hustle and had to tap into their savings to get by. And alas due to the rising prices, the couple decided to further cut down their spending.
William and Amelia are considered ‘asset-rich, cash-poor’ retirees, a special elderly demographic composed of seniors whose wealth is tied up in illiquid assets, particularly their home.
The Australian Bureau of Statistics (ABS) estimates that almost one-third of Australian seniors in low-income households belong to this cohort.
Tapping into home equity: downsizing versus Reverse Mortgage
In 2021, the national housing values increased by 22.2%, adding around $126,700 to the median value of an Australian home.
So William and Amelia now have more equity under their roof. But accessing this wealth is not exactly easy.
“Cashing in on that new-found wealth is becoming costlier,” according to Sarah Megginson, the money editor at Australian comparison website Finder.
“Property prices have grown exponentially over the last 20 years. Back then the price points were so much lower. If you sold a property you were spending a much smaller percentage of it on real estate commission. Now, with the average dwelling price in many places, you’re looking at a $30,000 commission, which is a huge chunk. And it makes the calculations sometimes really unsustainable.”
Megginson added that it will cost a small fortune to downsize in real estate commission to get out of the property and then another small fortune in stamp duty to get into a new one. So downsizing can actually be a really expensive exercise.
An alternative to downsizing is a home equity loan also known as a Reverse Mortgage, a type of loan designed for senior homeowners who wish to unlock a part of their home equity and convert it into cash.
This is an ideal solution for ‘assets rich, cash poor’ retirees like William and Amelia.
Just like a conventional mortgage, a home equity loan is also secured by the property, and the portion of equity that can be unlocked depends on the property age and value.
With William and Amelia’s property valued at $700,000, they can access up to $200,000 that they can take as lump sum, a cash reserve, a regular income or a combination of all.
The interest is ‘capitalised’ or charged back to the loan account and will compound over time so the balance of the loan will increase unless voluntary payments are made.
The loan, including all interest and fees owed, is repaid to the lender when:
- The borrower sells the property of their own accord, OR
- The borrower moves into aged care (not required with some lenders), OR
- The last surviving borrower dies
No Need to Sell Your Home and Move to a Smaller House
Many seniors love the idea of getting a Reverse Mortgage because they can stay at their home for as long as they want.
Unlike downsizing, you don’t need to move to a smaller home or into an aged care facility.
The bank cannot force a sale of your home as long as you don’t default under the agreement by breaching key obligations.
Your specialist broker should thoroughly discuss your options and it is ideal to seek independent financial advice before you sign up any agreement.
For inquiries, you may contact Seniors First on 1300 745 745 or click HERE to learn more about the Reverse Mortgage application process
*While a fictional case study, William and Amanda’s situation represents many real-life similar Australian senior couples who are assets-rich but cash poor.