14th Jul 2016

Reverse mortgages: funding retirement without selling up

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Documents for reverse mortgage on a table what is reverse mortgage
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As the cost of living increases and older Australians look for new ways to fund retirement, reverse mortgages may become a more popular theme. 

A reverse mortgage – sometimes called home equity release – is a loan that is secured by the equity in your property. It essentially means you can continue to live in your home, while using the loan as an extra source of income.

Of course, all loans have to be paid back eventually, but unlike other mortgages, you do not have to make repayments while you’re living in your home. Instead, the interest gets added to your loan balance. The balance then gets paid when you leave home or pass away.

The pros of reverse mortgages
The key benefits of reverse mortgages are twofold – you receive an income stream or lump sum to live on (usually to the value of 15-20 per cent of your property) and get to continue to live in your home until you die or move into aged care.



An added bonus is not having to pay back the loan in regular instalments, as you would with another mortgage, which means whatever money ends up in your bank account is yours to spend. If you do want to make repayments, some lenders allow you to do so.

Lenders, obligations and risks
A regulatory crackdown a few years ago tightened lender obligations around reverse mortgages. Lenders must now make sure their borrowers do not end up with a loan higher than their property’s worth. This is important as it means your family is not left in debt when the loan has to be repaid. However, four years after the legislation was passed, there are far fewer lenders in the reverse mortgage market than there was previously. 

If you are considering a reverse mortgage, it’s still important to have a repayment plan in mind. Interest compounds and the rate is often higher than rates for other mortgages, so it’s worth thinking about the costs associated when it comes time to repay (ASIC has a reverse mortgage calculator that may prove handy when doing the sums).

Reverse mortgages can also affect your pension eligibility, so a call to Centrelink is critical for any pension recipient about to sign on the dotted line.

The other thing to consider is if you have a partner, family or a co-tenant, but the reverse mortgage is in your name, they could be forced to move out if you go into care or die. It’s important to have a plan around these scenarios. 

The bottom line
Reverse mortgages are certainly not a one-size-fits-all solution to retirement cashflow shortages, but for the prudent borrower who wants extra income for retirement – while living in their own home – they could be worth further investigation.

Kate Cowling is personal finance editor at RateCity.com.au. This is general advice only and should not be substituted for tailored financial advice.





COMMENTS

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HS
19th Jul 2016
10:40am
We've been on this road before thanks to simple 'Simon'.

19th Jul 2016
11:26am
A reverse mortgage is very similar to marrying for money - in the future you will regret having done it and will end up paying for every cent of it.
Mazza
19th Jul 2016
11:37am
Please explain "reverse mortgages can also affect your pension eligibility"
tams
20th Jul 2016
3:21pm
Hi Mazza,

A reverse mortgage can affect your pension entitlements if you access a lump sum and deposit in your bank.It is then deemed. You are allowed to earn just on $4,000 per year from deeming. But you wouldn't really put a lump sum in your account. You just draw down what you want when you need it.
If you take a lump sum to buy a car, then the value of the car becomes assessable.

Paul
Rosret
19th Jul 2016
1:56pm
Its a sad day when you need to reverse mortgage to fund your retirement. If it wasn't for my parents I would be working until my days end. I hope to pass on the best legacy I possibly can to my children. For anyone to suggest this would be giving the government more ways to make sure "they take it all". This idea lends itself to the individual spending every cent you earn because the banks or the government are going to take it anyway. The younger generation will be lucky to pay their mortgages off by retirement so what would this mean? - we are just renting our homes from the banks for life?
HS
21st Jul 2016
2:34pm
This means that the bankers pay off their homes and invest in other properties for themselves...all thanks to the naive and gullible.
eddie
19th Jul 2016
5:07pm
been there done that the legal cost was like some 7000 dollars for a 50.000 mortgage no way man I plot along as we are don't give 7000 away out of 50.000
HS
21st Jul 2016
2:31pm
Wow ! What a rip off !
Priscilla
19th Jul 2016
7:17pm
There is no way I will consider paying TWICE for my home.
SusieQ
19th Jul 2016
9:36pm
My advice is don't. We took out $60,00 in 2008 and now owe $121,000 .
If you must then try and pay the interest a little from the start. We paid %600 two months ago for one month interest. and it made hardly any difference. I have said before it is the worst thing we ever did as we look like ending up with nothing, Heaven help us if we need to going into a nursing home .
We now have to look at selling our home and renting to get out of it. So much for all our hard work and paying for a house . Susie Q
HS
19th Jul 2016
10:42pm
Firstly, SusieQ - I'm sorry to read about your poor situation.

Secondly, it is your kind of scenarios I've been warning age pensioner readers about ever since Simon Cowan advocated to the government an option of Reverse Mortgage Pension Loans for pensioner home owners instead of paying them age pension.

Who is Simon Cowan?
Expertise: Government industry policy, car industry and regulation.

Simon Cowan is a Research Fellow in the economics program, and Director of the CIS TARGET30 program that aims to reduce government spending to less than 30% of GDP over the next 10 years. He is a leading media commentator on policy and politics, frequently appearing on the Sky network, ABC television and commercial radio. He has also written on government industry policy, defence and regulation and appeared before the Australian Senate discussing the budget and health policy.
He co-authored the leading CIS research report on pensions and retirement policy, released in 2015, The Age Old Problem of Old Age: Fixing the Pension.
http://www.abc.net.au/news/simon-cowan/4184450
Rae
20th Jul 2016
11:43am
Nasty Susie at your time in life.

I had a similar experience borrowing for a business when the interest rate went to 23%.

I was finally forced to sell up an investment property for a big discount.

Don't leave it too late if you need to sell and buy something cheaper.

It is a good lesson to those thinking of doing this.

It is also a pity the compounding doesn't seem to work quite as efficiently the other way. Our savings of $60 000 certainly wouldn't be worth $121 000 after 8 years I'm sure.
Rae
20th Jul 2016
11:50am
Don't be to concerned about the nursing home. If you have nothing they can't charge you a bond. There are 10% of places for people with no assets by law.

Just don't worry. It is unfortunate but a sale might be your best option.

There are some lovely small towns close to major centres where property is cheap in central NSW
. My son and kids moved west a few years ago and haven't looked back.
Family visits are delightful. We don't see them as often but the visits are of great quality.

Never fear change as a door closing means another opens.
tams
20th Jul 2016
3:26pm
Hello SusieQ,
The information you provided is only half the story.
What would be interesting to know is
1) Why did you take a lump sum and what was the purpose of the monies
2) What was the value of your home in 2008.
3) What is the value of your home now.

Paul
GrayComputing
20th Jul 2016
9:46am
It seems that all the banks have all pulled out of this nice reverse mortgage idea
So as usual without strong protective legislation with teeth this nice idea will ruin many lives.
Instead of banks the usual bunch of quick loans and no interest (hah) retail rip off merchants/loan sharks are all circling in the pensioner pool hoping for a very lucrative meal of 18% to 40% interest profit per year for them.
So be beware and stay terrified. In the UK there is some better legislation on this sort of scheme.
tams
20th Jul 2016
3:17pm
Hi GrayComputing

Fact 1
Reverse mortgages have more consumer protections than any other home loan in Australia
Fact 2
Current interest rates are 6.29 - 6.55%
Fact 3
Current lenders include CBA Bankwest and St. George
Rae
20th Jul 2016
6:00pm
Has anybody shared with those banks that the Swiss are selling negative yield 50 year bonds?

Why would Susie pay 6.29% when she could get the bank to pay her to take the money?

It's a joke right.

Bound to end in tears

Anyone paying over 6% for worthless money needs their head read.

Better to sell overpriced assets and downsize.
Rodent
20th Jul 2016
5:37pm
Dear HS

You are 100% correct about "Mr Cowen" I have read all his BS , as you correctly quote, what he says does not stack up, especially as it links to Pension matters. Unfortunately he still gets a lot of Media time, to promote his views.
Rodent
20th Jul 2016
5:45pm
All - what is worth considering for SOME is the Centrelink Pensioner Loans Scheme, because the Home Valuation is FREE, and the Interest rate is the Lowest at 5.25%pa, where it has been for the last 17 Years, yes it has not changed for 17 Years.
HOWEVER there are only 4 Centrelink staff in all Australia who know how to administer the scheme. I wrote to Centrelink with a lot of questions and got a FULL reply to all my questions.

Last year several interested parties, Jackie Lambie and others proposed widening this scheme so that ALL pensioners may be able to use it not just part Pensioners as a makeup to cover pension loses, as per the Jan 2017 changes
Rodent
20th Jul 2016
5:49pm
In addition to what I just posted for those INTERESTED read this
Technical Brief
Boosting retirement
incomes the easy way
Extending the Pension Loan Scheme to all
retirees
Technical Brief No. 34
September 2014
ISSN 1836-9014
Richard Denniss and Tom Swann The Australia Institute
Rodent
20th Jul 2016
5:55pm
Part 3

These were my questions to Centrelink re the PLS
Centrelink
Manager Pension Loan’s scheme
PO BOX 7800 Canberra
BC ACT 2610


Dear Sir/Madam

I refer to the enclosed documents about the Pension Loans Scheme. Although I have a good understanding of Reverse Mortgage Type schemes, and a working knowledge of the Pension Loans Scheme I would like to have the following questions answered please BEFORE I consider making an application under the scheme.

• Any make up payment amount is based on what Figure please. By that I mean, is it based on the Maximium Basic Rate ie $1179.20pf or the Total Rate -$ 1296.80pf Including Supps - for a Home Owning Couple Combined
• What Home Loan value - LVR - would be necessary to provide a make up value of approx. $600 per fortnight.
• What are the set up costs for establishing the Loan. I understand I would be sent a letter, BUT some indication of these costs would be helpful up front please.
• How and when can any repayments be made.
• What is the specific repayment method used, are there options such as BPAY, direct Credit, or what other methods are available.
• How would I receive confirmation of any such payment.
• What Reporting of the current Loan balance is available, can it be viewed on Line, sent as a Quarterly statement, or other. Does this show Payments made, and Interest charged/Accrued.
• The document says payments are reviewed regularly- this means what?
• I understand that any valuation of my Property by an Accredited Valuer is at NO COST to me is this correct?
• How does the scheme adjust Payments, when normal Pension increases are applied in March and September each year.

A written detailed reply to each of these questions is requested please, so that I may consider my options.
SusieQ
20th Jul 2016
11:04pm
Firstly thank you to those responding to my dilemma. In 2008 our home was valued at
$ for$ 400.00. We went thru the HSCS who then became teh BOQ then they gave up the reverse mortages and so we had two more changes and on it goes. We needed to finish the house and also to update our car,.
Yes it was too much and the banks of course encourage this.
Now Here in the part od WA we live whilst in the metropolitan area prices have gone up ours have gone down and not worth the $400.00.
I just hope that anyone reading this who is considering a reverse mortgage realises it is a big mistake . And if it saves one person then I don't mind airing it. Although I don't really like everyone knowing our situation . But we are lucky to have yourlifechoices looking after our backs.
I bet Simple Simon doesn't need one . Susie Q
Rae
21st Jul 2016
9:54am
Seek help Susie as quickly as you can.

For your loan to have increased the way it has suggests an interest rate above 8% or very high annual fees and charges.

I'm not sure who you can see but your local member's office should be able to put you in touch with the appropriate government debt help organisation.

You may be able to get a cheaper home loan and begin paying it out.
JO
23rd Jul 2016
1:17pm
Centrelink has a FISO Financial Information Services Officer pre any major financial change or decision all should ring and make appointment for a chat. They are a great free service.
marg396
3rd Sep 2016
10:09am
Be very careful. I got burnt, organising a reverse mortgage with a so-called community bank. When I had to leave my home due to a crisis, and sell it, the so-called friendly community bank was a greedy ruthless business partner. Legal. Yes. With exorbitant interest costs because of the short term of my reverse mortgage. Over $20 000 for EIGHTEEN MONTHS!!!!! If you are tempted to take out a reverse mortgage PLEASE pay for informed legal advice first.
HS
4th Sep 2016
1:55am
Sorry to learn about your experience but I'm pleased you confirmed my apprehension about reverse mortgages and the impact of predatory exploitation of vulnerable pensioner home owners by government commissioned foundations such as " CIS TARGET30 program " that aims to reduce government spending by means of 21st century piracy.


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