Equity release – is it for you?

A Reverse Mortgage may be a good way to access money for those who are asset rich but cash poor

Reverse Mortgages, pirfalls, rich, poor, cash, money, finance, Equity release – is it for you?

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 and can be used to bolster your retirement income. 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 to family members

  • what are the implications of any money you withdraw on the Age Pension and tax you pay


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 as 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 which will enable you to plan for your retirement.

The Equity Release/Reverse Mortgage Information Service (ERRMIS) is operated by National Information Centre on Retirement Investments (NICRI) and was launched in February 2009 in response to the growing number of enquiries from members of the public.

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 NICRI.





    COMMENTS

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    Pass the Ductape
    7th Mar 2014
    10:24am
    I hate to dumb down something that at first glance might be a good thing, but there seems to be a lot if's, but's and maybe's in this little lot and who would have all the answers and the knowledge to work out the best way forward? By the time all the pros and cons are worked out - the worry about whether one is doing the right thing is likely to drive anyone into an early grave before a deal is signed!
    Bofor
    7th Mar 2014
    12:33pm
    Having first hand experience at one of the big pitfalls of a Reverse mortgage I say check very carefully all the little writing.

    I found when due to a marriage break up when I wanted to sell my house there was a "BREAK FEE".
    The original lender assumes the loan will run for X number of years netting them Y number of dollars.
    This is based on the age of the youngest borrower.
    So you want to opt out before this stage the lender charges this Break Fee.
    In my case a loan with a balance of $69,00 including all interest accumulated now has a PAY OUT of $88,000. That is a Break Fee of $19,000.
    student
    8th Mar 2014
    3:18pm
    I recently inquired about drawing on the equity in my home (I own said home) but was told I would have to accept 3x's the amount I wanted. I only wanted $10,000 but had to take a 'loan' for $30,000. I was told I could repay the unwanted $20,000 as soon as I received the money and thus not have interest on the $30,000. I think I may be safer building a granny flat near the children rather than slowly blowing their inheritance :)
    Pardelope
    3rd Jul 2015
    3:29am
    Be VERY careful. Check with the Australian Tax Office, Centrelink, and a solicitor who specialises in this sort of thing.

    Ask what happens if the value of the property falls below the original valuation e.g. due to real estate fluctuations, bushfire or storm destruction.

    Ask what happens if one person needs to go into a nursing home, you need to move elsewhere, the place needs renovations, you need more cash flow.

    Consider the risks involved in putting your home on the line for a (possibly small) amount of money. Would a personal loan be a better option (if available)?

    Check around with a number of companies and get good financial advice before you make a decision. Check the fine print carefully before you sign anything.