18th Nov 2016
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Is equity release the right choice for you?
Pros and cons of reverse mortgages

Given that for those over 65 years of age, 70 per cent of their wealth is tied up in the family home, it’s not surprising that a growing number of Australians are considering equity release products, such as reverse mortgages to help manage financial commitments. However, such products have received their fair share of bad press, so it’s understandable that people are reluctant to commit without knowing more.

How do they work?
A reverse mortgage allows you to access the capital in your home, using the property as security. The money released can be taken as a lump sum, regular payments, a line of credit or a combination of all three. Which method suits you best will depend on how much money you need to access, what you need to access it for and what impact on your Age Pension or finances it will have.

The interest on the money borrowed accrues and is compounded, so you don’t make any repayments until you vacate the property. You remain the legal owner of the home and can live there for as long as you wish.

Who can get one?
To qualify for a reverse mortgage, you have to be over 60 and have sufficient equity in your property. You do not need to have an income, but lenders are required by law to lend money responsibly, so not everyone will automatically be granted such a loan.

How much can you borrow?
How much you can borrow depends on your age, although it will also vary between products. The minimum amount you can borrow is around $10,000 and the maximum is a percentage of the value of your home, which increases the older you get. Typically, you can borrow between 15 and 20 per cent at age 60, with this rising one per cent for every year above this age.

How much does it cost?
Fees and interest rates will vary between products and it’s worth noting that interest rates for reverse mortgages are often higher than standard mortgage rates. As the interest is accrued and compounded, the amount you actually owe can increase rapidly. Some products will allow you to protect a portion of the value of your home so that you can put some aside for an aged care bond or similar.

What if I end owing more than my home is worth?
Any reverse mortgage product taken out after 18 September 2012 must include negative equity protection, so you can’t owe more than your property is worth. Should the property be sold for less than is owed, neither you nor your estate can be held liable for the debt, unless there have been fraudulent practices by you or on your behalf. If your home sells for more than is owed, you or your estate will receive the additional funds.

Are there any risks?
As with every financial transaction, there are risks involved. You should note:

  • interest rates are often higher than average home loans and can rise considerably over the period of the loan if a variable option is chosen
  • a fixed interest rate agreement can be expensive to break
  • compound interest can cause the debt to rise rapidly
  • what you do with money may affect your Age Pension
  • if you’re the sole owner of the property and have a dependant staying in your home, that person may not be able to stay there should you die

If you think a reverse mortgage could be for you, you need to:

  • undertake more research
  • check with Human Services how your benefits may be affected
  • get independent financial and legal advice
  • check if your preferred providers are members of Senior Australians Equity Release (SEQUAL) and adhere to the minimum standards it requires from its members

The next step is to consider which provider is best for you and to help you make the decision, you should ask each one the following questions:

  • Can you have a reverse mortgage information statement that includes the following information:





    COMMENTS

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    MICK
    22nd Nov 2016
    10:14am
    Debbie, Debbie, Debbie.
    People whose greed pushes them into a reverse mortgage are either totally stupid or have no regard for their children and grandchildren.
    Governments love it because they can avoid paying pensions. That gives them more money to give tax cuts for rich Australians. The perfect storm sold to the mentally challenged. And when these poor (literally) folk are destitute their "will be wailing and gnashing of teeth".
    God save us all from stupidity and ignorance.
    Old Geezer
    22nd Nov 2016
    1:13pm
    What has it to do with one's children or grandchildren? It is your money so why not spend it instead of leaving it behind for others to go first class to Disneyland.
    MICK
    22nd Nov 2016
    2:20pm
    If we are to be a decent society then this is a no brainer Geezer. I am sorry that your family situation did not work out as well as it should have but you are not alone there.
    Your issue should be 'when', not 'if'. Giving children money early in life is fraught with danger as they fail to appreciate that the stuff does not fall out of trees. Once they have had their own struggles they start to come around and realise how hard it is. That is when you loosen the purse strings...........unless bad partners are involved. That is when you do this through a Trust so that your children get some of the benefits of your lifetime of work and pain.
    I think I understand you Geezer, but being bitter is not the way forward especially where family is concerned.
    Cheers.
    Old Geezer
    22nd Nov 2016
    3:09pm
    Ha ha Mick my family was brought up too well and would rather I spent the money than left it to them. Yes they have all done very well for themselves thanks to my teachings. I am very proud of them and what they all have achieved in life.

    You don't understand me at all Mick.
    Old Man
    22nd Nov 2016
    3:33pm
    I agree with you MICK and to quote Dave Allen; "Those without teeth will be supplied.."
    MICK
    22nd Nov 2016
    9:15pm
    Congratulations Geezer. That is a tick against your name.
    OlderandWiser
    23rd Nov 2016
    4:43pm
    Yes, well done Geezer. Just sad that you are so tunnel-visioned that you assume every family that brings their kids up as well as you did has kids with no needs! I'm proud of my kids too, and they would also rather I spent on myself than on them. But it wasn't my daughter's fault that she gave birth to a child with extensive special needs and very high health and care costs. As his capacity to support himself is likely to be very limited, I'd like to leave him something to help him on his way. Disneyland never entered into the equation. It's about saving the government the cost of his future care and saving him the pain and suffering that poverty and dependence causes.

    Of course you would prefer that my beautiful and charming grandson was murdered, because you ASSUME that a child with high needs has no quality of life. Sad that you can't get to know him. He's a delightfully charming and very happy little boy. He is likely to grow into a fine and contented young man. He just happens to have needs that most of us are fortunate not to have - due to an accident of birth. And after 5 decades of hard work and paying far more than my share of tax, getting bugger all value, and suffering hideous injustice, I believe I should have the RIGHT to leave MY MONEY to meet some of those needs if I so desire. I do NOT think I should be forced to donate it to well-off taxpayers who lived the high life and didn't bother to save as much as I did.

    But keep on with your idiotic rants. Like the stupid politicians who supported the ill-conceived assets test change, you can't see past your nose. The cost to taxpayers will rise. Poverty will increase. Taxes will go up. And the selfish fools who supported the policies that caused it will scratch their empty heads and wonder why!
    mudGecko
    22nd Nov 2016
    10:32am
    I want to thank Debbie for an informative, balanced article. In seriousness, I ask Mick where exactly does his terms "stupid" and "destitution" come in, given that the home is able to be used by the owners until the last one dies, and the money released would provide a better life for the owner(s), who have earned it? It seems to me that the only losers would be parasitic offspring who are waiting around to profit off their parents' toil and wisdom. Just sayin'.
    Farside
    22nd Nov 2016
    11:49am
    mudGecko, Mick has regularly expressed the view that consuming one's capital is a mug's game – living off capital rather than the interest on capital leaves one like a shag on a rock I think is the expression he has used.

    Few on this site accept the view that capital should be used to maintain an improved quality of life during retirement.
    TREBOR
    22nd Nov 2016
    12:39pm
    The ancient tenet of the old money rich is 'never lose your capital' - so one rule for the rich, another for the rest?

    Mick is totally correct - never lose your capital.
    Sundays
    22nd Nov 2016
    1:03pm
    Yes keeping your capital is a nice idea but not always possible. It depends on how much you have and what returns you get. Personally, I would feel more like a shag on a rock if I had to stress each day worrying how to survive in retirement while not drawing down on my capital. Guess, I'll end up a poor 90 year old with not much capital left and the poor kids and grandkids will just have to share the proceeds from the sale of he house
    Old Geezer
    22nd Nov 2016
    1:16pm
    It's your capital so you should spend it on your retirement. Stupid idea not spending down your capital when you saved it for the purpose of retirement.

    Rich actually do spend their capital in times of need and accumulate it again in times of plenty. They also take risks that normal people wouldn't dare or in most cases even realise exist.
    HarrysOpinion
    22nd Nov 2016
    1:57pm
    Let's assume that one has a lifespan of 20 years from age of 65 they take out a reverse mortgage of $100,000 on their $500,000+ home. The compound interest rate 7% pa. By the time one reaches their end of 85 years the debt owed will be nearly 4 times what you borrowed $386,968 not to mention the up front costs of getting the reverse mortgage, on going bank fees plus legal fees on entry and the exit legal fees when one becomes deceased. On the other side of the coin, the today's value of the $500,000+ home may appreciate in value every year by 2.5% pa. This means that the future value of the home on the market should be around $820,000 less the value of the reverse mortgage in 20 years time of $386,968 leaving a balance of the home-estate at $543,000 (assuming the annual interest rate is constant or fixed). In regard to age pension, the $100,000 in cash will decrease the fortnightly pension payment by whatever the deeming income rate calculates but one can draw on the cash in bank as needed. The problem is that the $100,000 in the bank will not last long if you draw on it every week. If you draw $100 a week by the end of 20 years the balance will be $19,721. If you don't draw a cent, the $100,000 will grow to about $148,000. Remembering that every time it goes up by $2,000 one has to report the change of circumstance and your pension will decrease respectively. So, if you are going to do it remember that you will owe 4 times more what you borrowed, your fortnightly pension will be reduced within 14 days of you declaring the $100,000 and that if you draw more than $100 per week on your cash it will not last 20 years but as you declare the lower bank balance your fortnightly pension will gradually increase providing you declare your circumstances within the stipulated Centrelink age pension rules. Is it that stupid? Yes ! But then again if a pensioner is desperate there is no other choice. Researching ALL the implications and all the costs at the beginning and at the end and what is hidden in the middle, negotiating the best deal is of paramount importance as is good, essential, legal advice from a solicitor who specialises in real estate law.
    Old Geezer
    22nd Nov 2016
    2:02pm
    HS you just made a good argument to why the assets test should include the house.
    MICK
    22nd Nov 2016
    2:24pm
    Guys.....sorry if I have hit a nerve. Not the intention here.
    The problem with society is that we have become greedy and care only for ourselves.
    Despite the clever sidesteps I can see that some folk are thinking about their own lifestyle in this debate and tough luck for the kids. Even people who were badly treated by their own parents would want their children to have an easier ride than some of us have had.
    What sort of generation have we become?
    MICK
    22nd Nov 2016
    2:25pm
    Gremlins!
    tams
    22nd Nov 2016
    2:31pm
    To HS

    Based on the example you gave of somebody wanting $100 a week for 20 years, that could be paid monthly with the end debt being $229,600, not $386.968

    If $100,000 is taken as a lump sum or periodical payment, there is NO reduction to the aged pension.

    "Researching ALL" is important - hope this research helps you
    tams
    22nd Nov 2016
    10:41am
    MIck, Mick, Mick
    The vast majority of reverse mortgage borrowers are already on the age pension, and remain on the full pension, so the Government has no reduction in paying pensions.
    Your comments do not reflect a significant number of older Australians who wish to use their increased value in their home (or investment property) to meet their needs.
    Their needs are not "greed based". They may need to pay for repairs and maintenance, buy a car, or to keep paying their private health insurance, and simply the age pension cannot pay for these needs.
    God save us from uninformed comments

    The article is well written except
    -All reverse mortgage lenders are no longer members of SEQUAL
    - Fixed rates have not been available for 7 years

    The most appropriate use of equity release is to access what you want when you need the funding, So regular periodical payments and a cash reserve are the best use. A lump sum when not all is required or a Home Reversion Scheme (lump sum only) should only be viewed when other considerations have been made.
    MICK
    22nd Nov 2016
    11:22am
    Those who own their own home can manage nicely on the OAP unless there are significant medical costs. And then the health system picks up the tab.
    Your assertion about "needs" appears to be misplaced and even on the pension maintenance is easily covered. If we are talking about modernising and fashion rather than keeping things going then this is a totally different issue.
    Those whose greed to spend pushed them into reverse mortgages will be very sorry as the cost of rents keep rising with property values and down the track when inflation gobbles away their money they will regret it.
    And then there are the children and grandchildren...........but who gives a damn right?
    TREBOR
    22nd Nov 2016
    12:42pm
    A nice way to accelerate inter-generational poverty so the elite can rule without interference.
    Old Geezer
    22nd Nov 2016
    1:19pm
    Why freeze and starve in a mcmansion?
    TREBOR
    22nd Nov 2016
    1:40pm
    I prefer Stately Trebor Manor to a McMansion....
    MICK
    22nd Nov 2016
    2:27pm
    Good observation TREBOR. As I keep saying rich people live off the interest and poor people live off the capital. The difference between the two is likely 'intelligence'. Given that more than a handful of people still vote Liberal and fail to see what they are supporting why does that not surprise me.
    Maybe I am getting too old and cynical. Time to go skiing........
    Old Geezer
    22nd Nov 2016
    3:38pm
    I live the life I want not the life I can afford. It has nothing to do with living off the interest or capital.
    MICK
    22nd Nov 2016
    9:14pm
    Good luck with that mate. I am currently living a good life too but I paid the piper many times over to get here and now scrimp all year for a lash out indulging my passion. Ain't easy with a government coming after you for every dollar you have but we do what we can do.
    For the record I'll be trying to preserve some capital so that my children do get a nest egg left to them and their children for what may be an increasingly hostile world to come. I do not have it in me to 'spend the kids' inheritance no matter how much pain they cause. Neither should you Geezer.
    Oldman Roo
    22nd Nov 2016
    9:45pm
    While I would not like to see legislation banning reversed mortgages , to me even considering it is totally unacceptable .
    During all of my working life I have often worked evenings and weekends in order to safe and provide for retirement without Centrelinks payments . Unfortunately due to the Pension reform , low interest rates and major setback in my earning capacity , I did not make the grade and became Centrelink dependent . So to add insult to injury from January 1st , I will be financially worse off , due to my savings , than a person who never saved and receives a full Pension .
    I also believe I owe the proceeds from the sale of my house to my children who were depraved of much in their early life by a fool who who believed in working hard and saving .
    Teddy
    22nd Nov 2016
    12:00pm
    I am not clear why the article is about a reverse mortgage when the title was for equity release products. The two operate quite differently.
    Rodent
    22nd Nov 2016
    12:56pm
    Teddy

    Yes I agree with your comments, I would have thought the thrust would have been about Equity Release products, as you rightly say Reverse Mortgages are an entirely different product all together, and need to be examined in FULL DETAIL before even considering this option. The average Interest rate alone of on average 7% to 9% should put most people off them
    MICK
    22nd Nov 2016
    2:29pm
    Is "equity release" not a synonym for a reverse mortgage. I mean you are releasing the value in an asset.....and likely putting yourself in future jeopardy but let's not let a word get between the truth and the dream.
    tams
    22nd Nov 2016
    2:40pm
    There are two types of Seniors Equity Release

    1) Reverse Mortgage - which we all have a LITTLE bit of knowledge

    2) Home Reversion Scheme - this is a partial sale of the home at a discounted amount against its future value. Sounds complicated? - it is.
    If you receive 10% of its current value, in 10 years time you repay about 18-19% of its value at that time.
    Only available in Melbourne and Sydney - not regulated by ASIC, unlike reverse mortgages
    Rodent
    22nd Nov 2016
    5:50pm
    Tams

    Just noticed your earlier comments -Seniors Equity Release
    If you are referring to Homesafe Wealth Release- and I suspect you are your next statements may be incorrect re 10% , repayment etc The % does not change- you elect to effectively give Homesafe a FIXED up front percentage of the homes current value, say 20% . When the home is eventually sold( yes it may be at an increased Value- BUT it may not), Homesafe still only gets their agreed up front Percentage.
    In its most simple terms the amount of money you might want to receive as payment up front (say its $100,000) is actually taken by them to be about Double that amount, depending on LVR, age, Home Value, and several other factors- yes its complicated, even harder to explain than trying this way- I asked Homesafe 34 different questions, and got written answers to all my questions, but decided it was not appropriate for me. (PS) the scheme/offering is only very slightly different now
    Charlie
    22nd Nov 2016
    12:23pm
    Equity Release, it means nothing to me. I wish we would lose this equity, equality, confusion and start calling things what they really are. Every time a person wants something that somebody else has got, the E word seems to come up.

    Its like trying to tell what a movie is about, from its title. There was a time when a person could make a reasonable guess, but not any more
    China
    22nd Nov 2016
    12:33pm
    What is this site? A propaganda machine for the government.

    Life choices should not be on about promoting the idea for older Australians to have to sell their home so as to assist the government to meet its budget objectives!
    MICK
    22nd Nov 2016
    2:30pm
    Fully agree. We have seen this 'story' appear several times in the past year. Why?
    KSS
    23rd Nov 2016
    6:59am
    Why? Because the site organisers are obsessed with about three topics: bash the Government, complain about medicare and whinge about all things 'pension'.

    They need to get out more and find something else to talk about.
    TREBOR
    22nd Nov 2016
    12:38pm
    Tighten up the tax system, get rid of privatisation and restore lower costs of living, chop out the current housing investment madness, and so forth, make the nation more competitive ™ by permitting workers to live and prosper on lower rates to compare with lower costs of living, get rid of all the dead wood and parasites who infest House Australia these days in politics, business and various QANGOs - and leave pensioners alone with their miserly pension.

    Isn't fifty years of often desperate struggle against political interference, social engineering, bad management often based on 'educated' twerps, the false striving by politicians and their cronies for a better for themselves all the time and so forth - enough to secure for an older Australian a peaceful retirement?

    NO - equity release is not a viable alternative to a fair go.....

    Thank you all for coming..... meet me at the town square and watch the festivities as we erect the guillotine...
    Old Geezer
    22nd Nov 2016
    1:20pm
    and bring on a depression?
    TREBOR
    22nd Nov 2016
    1:41pm
    Plenty of that going around already, OG.
    MICK
    22nd Nov 2016
    2:34pm
    Good post TREBOR. It never ceases to amaze me that some folk on this site who by all accounts are not total morons show such ignorance at the system we exist in and who it favours and panders to.

    I could bring housing down like a brick. Not hard. Freeze interest rates for anybody who has taken out a mortgage in the past 15 years, ban foreign ownership of land in Australia and give those with property 12 months to sell up and reduce tax deductions for negatively geared products. All of them. Deal done!
    TREBOR
    22nd Nov 2016
    3:08pm
    Just last night on another forum a discussion was raised about power costs up 500%+ over the Age of Privatisation - end privatisation now and let this country stop feeding useless mouths.
    Just Sayin...
    22nd Nov 2016
    1:12pm
    Please expand your article to include the Reverse Mortgage Equivalent offered by Centrelink- it would be very useful Alternative for your Readers- especially those suspicious of "Banks and Finance Companies"
    Rodent
    22nd Nov 2016
    1:20pm
    Just Saying

    Again a useful comment. I and others have written about the Pensioner Loans scheme, (Centrelink) as its really a form of Reverse Mortgage, BUT much better than a Bank backed product because of its 5.25% compounding interest rate. (unchanged over the last 16 years)
    I have also said before that based on my discussions with Centrelink by a very detailed written Q and A there is only 4 Centrelink staff qualified in the whole of AUS that can talk it through with potential customers
    tams
    22nd Nov 2016
    2:03pm
    The Pension Loan Scheme is an option to consider.
    Unfortunately it is only available as a periodical payment and not as a lump sum.
    Nearly all reverse mortgage borrowers have a lump sum component.
    Centrelink does not provide a "no negative equity guarantee", nor does it need to provide projections or require borrowers to obtain independent legal advice.

    To Rodent, the average interest rate is 6.25% - not 7 to 9%

    Next year will see new entrants with interest rates reduced even further
    MICK
    22nd Nov 2016
    2:39pm
    Self interest again driven by the dream to live a lifestyle not affordable any other way.
    And then add in the rude assertion that robbing your children is 'good' because you need to live it up. Disgraceful Australian boomers trying to justify the unbelievable!
    I just hope that those who want to spend the equity in their homes fall on hard times when the financial system as we know it collapses. It's coming and I will have no sympathy for some of us as you'll get what you give out.
    Rodent
    22nd Nov 2016
    4:46pm
    Dear Tams

    I appreciate the points you make, My comments about 7-9% were based on Research data only 12 months ago, happy to check again. Also don't lose sight of the fact that for SOME a Periodic payment may be better than a Lump Sum, especially if the Lump sum may be counted as an Asset by CL

    When CL did a proposal for me re the PLS they calculated out all the Payment details for 1 year, 3 years, 5 years out to 20 years. I already had my own very sophisticated Excel calculator to do the necessary calcs.
    Are you aware of a Doc by the Australia Institute- Boosting Retirement Incomes the easy way -Extending the PLS to all Retirees -Technical Brief no 34 Sept 2014- its worth a read
    tams
    22nd Nov 2016
    6:03pm
    Dear Rodent,

    Thank you for reminding me of The Australian Institute report.

    The authors are regular contributors for Government to spend more.

    What the authors failed to research is that most reverse mortgage borrowers have a lump sum need, which is excluded from PLS.

    When we look at the current Equity Release market (reverse mortgage and home reversion schemes), consisting of approximately $4.2m, the vast majority has been taken as a lump sum.

    The market has yet to educate consumers about regular payments to meet costs of living needs. Yet, whilst over 90% of funds is used for lump sum purposes, PLS will never achieve market needs
    tams
    22nd Nov 2016
    9:43pm
    Sorry Rodent,

    That amount is $4.2b, not $4.2m

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    3:20am
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