Pros and cons of reverse mortgages
Like many YOURLifeChoices subscribers, Helene is considering if a reverse mortgage is the best way for her to manage her financial commitments. In the case of equity release schemes, knowledge most definitely is power.
Q. I have friends who have accessed the money in their homes through a reverse mortgage. While I understand the principal of such product, i'm not sure how they really work. Can you explain, please?
A. Equity Release Schemes or Reverse Mortgages as they are more commonly known, have received their fair share of bad press. However, with careful investigation and an understanding of the common pitfalls, a Reverse Mortgage may be a good way to access money for those who are asset rich but cash poor.
For those over 65-years of age, their home holds about 70 percent of their wealth, making equity release schemes a popular means by which to access capital. This is taken in the form of a lump sum, regular payments, a line of credit or a combination thereof. However before deciding if an equity release scheme is right for you, you need to consider the following:
how stable are interest rates and how will this impact on what you have borrowed
are property prices stable or likely to rise, you may find yourself in negative equity if a property price crash occurs
how long will you or your partner live – differing life expectancies or health issues may see the need for a move to aged-care
how will the compounding interest affect any inheritance you may be wishing to leave family members
what are the pension and tax implications of any money you withdraw
You will need to consider how you plan on using the money available to you. Many people enjoy the financial freedom afforded to them by equity release, where others have difficulty controlling how they spend the money which is freely available. Ask yourself if you can be trusted with that much money at your disposal.
Equity release is only one option available to access your home's capital. Downsizing can also release cash and with many state governments reducing the amount of stamp duty payable, this can be an affordable alternative.
The Equity Release/Reverse Mortgage Information Service (ERRMIS) is operated by NICRI, and since its launch in February 2009, has received 4000 enquiries from members of the public, highlighting the interest in such products.
As with all financial products, independent financial advice should be sought before entering into any arrangement but you can find out more about Reverse Mortgages by visiting ERRMIS.
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