Why a Reverse Mortgage?

Equity-rich, cash-poor retirees have literally been given a new lease of life with the development only a few years ago of a market in this country for reverse mortgages. For many Australians, the residential family home is their main asset but sometimes additional money is needed to renovate, fund an overseas holiday or to simply live on. Short of selling the home and moving into something less expensive, the answer can be a reverse mortgage. In a simplistic explanation, reversing your mortgage is another way of re-mortgaging your home, but this time, the financial institution gives you the money and you are not obliged to make any repayments until you leave and move into care, sell your home or pass away. When the loan ends, you or your estate must repay what’s owing from the proceeds of the sale of your home.

In the past, reverse mortgages have been somewhat contentious because of the potential for vulnerable retirees to be given incorrect or ill-informed advice. This has been addressed by the regulators, ASIC (Australian Securities and Investment Commission) and SEQUAL (Senior Australian Equity Release Association of Lenders) which was formed two years ago and is supported by leading providers of equity release products. However, before deciding on a reverse mortgage, all consumers should seek out independent legal and financial advice to ensure you’re making the right choice.
 

Spending the kids’ inheritance

The popularity of reverse mortgages can suggest a new-found, free-spending attitude by us “oldies” but it is more likely to be a case of parents wanting to fund all aspects of their retirement without bothering their children. According to a recent study (2007) there are currently 31,500 reverse mortgage clients in Australia, 80-85% of which have been drawn down as a lump sum with the remainder being used as an income stream. Couples are the most common borrowers, followed by women living on their own.  Currently, the average age of borrowers is 73.

Careful consideration needs to be given to the long term effects of a reverse mortgage. Will you have enough money after the sale of the property to fund aged care accommodation? Some products do allow you to protect a fixed percentage of the value of the property so it cannot be used to repay the debt. If leaving money to your children is important, there is now a “Protected Equity” feature available from six providers. Interestingly, 10% of existing reverse mortgage borrowers repaid their loans in full so there are obvously various uses for this product as a financial tool for the retired. 
 

“The challenge of retirement is how to spend time without spending money.”