Reverse mortgages have been every where in the media recently. Suddenly it seems that releasing home equity is THE solution for seniors facing lower pensions and possibly higher superannuation taxes, from a government under fiscal pressure. There was a great article published recently about this phenomenon. Even the Financial System Inquiry strongly suggests reverse mortgages as a way to support retirees’ cost of living and increase the activity of Australia’s overall financial system.
If you haven’t heard, reverse mortgage is a kind of home loan which allows you to draw money from your home equity. Unlike a regular home loan, reverse mortgage allows you to defer payment until you die, move out, or sell your home. For many Australians whose wealth is tied up to their home, reverse mortgage is a great way to tap home equity for extra funds that can be used for travel, aged care accommodations, or investment.
Since the outbreak of the global financial crisis, there has been an increase in lending and mortgage transactions by Australian banks. Today, these banks hold around $1.3 trillion in mortgages and continue to increase by the minute.
How can reverse mortgage help you?
Through reverse mortgage, you can access a lump sum or an annuity using your home as a collateral. One of the main benefits of reverse mortgage is that it allows you to still live in your house as long as you live or as long as you still hold ownership of the house. As opposed to selling your home when you need fund, reverse mortgage protects you from possible heartache of letting go of your home. Reverse mortgage can be paid through eventual sale of your house after death.
Effectively, you can use reverse mortgage for general living expenses to supplement your aged pension or super (or to fund your aged care accommodation costs).
What’s the difference between reverse mortgage and standard mortgage?
A reverse mortgage has the following qualities:
- Increases overtime – the loan balance increases as interest is added to the outstanding balance, unlike standard mortgage that decreases as you make repayments.
- It is protected by ‘no negative equity guarantee’ – despite the compounding interest your debt payable under reverse mortgage cannot exceed the value of your home.
- Higher interest rates – reverse mortgages generally have slightly higher interest rates because there is lesser competition in this sector, unlike standard mortgages. Also the lender may not receive any capital back for decades, so a slight premium on the rate applies.
- Lenders only provide up to 45% of property value, depending on your age – this is because of longevity risk and to allow a buffer for the possible long-term effect of compounding interest.
Why choose reverse mortgage?
In Australia, the government has legislated a no-negative-equity guarantee as a minimum requirement for all reverse mortgage providers. The government does that to protect borrowers and generally support the market’s efficiency. We are lucky because here in Australia because the market is heavily regulated with generally very good outcomes for senior borrowers.
With a responsible, regulated reverse mortgage industry Australian seniors at least have a viable solution to fund the increased longevity of an ageing population. This is important for pensioners and superannuants who are facing increasing pressures from government to fend for themselves, financially.
What do you think? Are reverse mortgages a gift for Australia’s ageing population?