Is a Reverse Mortgage right for you?

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Reverse Mortgage
Okay, so we have a whole generation that were told..."marry, buy your first home, work hard, have children and own your own home before you retire....then when you retire you will receive the Age Pension'.

A couple of problems with this.... Life doesn't always go the way we planed and some people don't feel the Age Pension (or their current source of income) is enough income to live off.

There are plenty of people around Perth WA who own their own home, but don't have enough income. This is your que...Reverse Mortgage....enter stage left NOW... 

As the name suggests, a Reverse Mortgage is just using the equity you have within your house (or investment property or holiday house) and drawing down on this as either a lump sum or as an income stream. 

Now, to do this you will need to use a lender that will offer a Reverse Mortgage contract. Of source, part of this deal is that they will have their name on the title.

How it works:

It is like a normal home loan, but in reverse. Instead of slowly paying off your home, now you are slowly drawing equity from the value of your home.

A bank or lender will usually charge a higher interest rate (usually around 2% or more higher than current home loan rates).

The Reverse Mortgage can pay either a lump sum or income payments each month. 

Depending on your age, the bank or lender will only allow you to withdraw up to a certain percentage of the property value. As a general rule, if you are age 60, the maximum amount will be 15% to 20% of the value of your home. At age 70, this increases to around 25% to 30%.


You must be aware of the following:

1) Lenders are very cautious in setting up Reverse Mortgages for people, they always want to make sure that you are fully aware of what you are doing. In most cases a lender will request that you also seek external advice from a financial planner, just to make sure that you know what you are doing and in some cases check if this will affect your Age Pension.

2) Before you take up a Reverse Mortgage it is a good idea to chat with your family about what you are doing (i.e. those likely to be dealing with your estate). The reason being is that it will affect your estate should you pass away. Whatever is owing on the mortgage needs to be paid back to the lender upon sale of the house or death of the owner. If your family assume that the house is fully owned and yet there is some funds that need to go back to the lender, they might be in for a shock. 

3) You need to make sure there is enough equity within your house should you want to go into Aged Care at a later date. This isn't usually a problem because the lenders don't usually allow you to borrow too high against your home anyway.   

5) Interest is only calculated on the borrowed amount, however keep in mind that this borrowed amount will increase each month as you drawn down some income.   


An example: 

Below I have shown an example of a couple you have a home worth $500,000 and they own it outright. At age 65, they decide to take up a Reverse Mortgage to pay themselves an extra $1,000 per month. I have assumed the house will increase each year by just 2% and the Reverse Mortgage rate is 7%.

By age 70 (in 5 years time) you will see they have been paid $60,000 (which is $1,000 per month for 5 years) and the interest is added to the amount paid out. So at age 70, this couple has a 'Total owing' amount of $71,593 (put another way, they have 87% equity.

By age 80, the Reverse Mortgage would have paid out $120,000, plus there is interest owing of $125,369.. So now the equity position is 64%. 
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In this example, if at age 80 the property is sold for the projected $672,934, then the lender get their $245,369 paid back to them and the rest ($427,565) forms part of the estate. Which is not a bad outcome.

Pros:

Allows you the home owner to free up equity within your house to maintain a lifestyle
Allows for financial independence without selling the house
No need to downside the home or relocate to obtain additional funds

Cons:

Reduces the value of the estate over time
May cause family disputes if there are unaware of your arrangement
May affect Centrelink - need to check with Centrelink or a financial adviser
 

I hope you have found this article helpful, please free to share with others. 
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