The reverse mortgage – One of many gambles in life? – Actual Property and Development
With the government encouraging self-financed retirees to use their home equity to fund their livelihoods, it is time to examine the pros and cons of a reverse mortgage.
During the 2020 budget debate, then-Deputy Minister for Superannuation Jane Hume told Parliament that self-financed retirees who are struggling to stay afloat should consider supplementing their incomes through the pension loan system. She added that the savings people have invested in their family home are part of the retirement income system.
Unlocking your home equity for use as retirement income
Under the state reverse mortgage model, retirees can take out a living loan that is backed up against their real estate and receive one and a half times the retirement pension.
Retirees can also access money from their home equity by going to a financier and applying for a reverse mortgage. The amount of loan available will depend on your age, the value of your home, and any other loans you may have secured against your property.
Reverse Mortgage vs. Regular Mortgage
The difference between a reverse mortgage and a regular home loan is that with a reverse mortgage you don’t have to make regular interest or principal payments.
Rather, interest payments are added to the loan amount (this is known as compounding of interest). The loan amount and any accrued interest is due when you sell your home or from your estate when you die.
Are There Risks With Reverse Mortgages?
To some extent, reverse mortgages can be a game of luck. Both you and the financier are betting on the likelihood that your loan capital and compound interest will not exceed the value of the equity in your home before you sell it or die.
However, under the National Consumer Credit Protection Act 2009, borrowers can never owe the financier more than the value of their property, and they can stay in their home until they die or decide to move out.
For example, let’s say you took out a reverse mortgage and after a few years the amount you owe your financier is $ 400,000. If your home is only worth $ 350,000 when it is sold, you don’t have to pay the $ 50,000 shortfall to the financier.
Compound interest increases reverse mortgage debt
With a reverse mortgage, the loan amount increases as the interest payments are added. For example, if you borrow $ 50,000 at a fixed rate of 5% per annum on May 1, 2021, your interest payment for the month of May will be approximately $ 208.
On June 1, 2021, your loan capital increased to $ 50,208. So instead of calculating June interest on the $ 50,000 originally borrowed, it is calculated on $ 50,208.
By the end of 20 years, your equity will have grown to $ 135,632.01 consisting of your initial loan capital of $ 50,000 and compound interest of $ 85,632.01.
Other costs related to reverse mortgages
Before deciding to apply for a reverse mortgage, it is important to understand several factors. For example, the interest rate on a reverse mortgage is usually higher than that of a regular home loan.
Also, your loan amount will be considered a means test loan amount, which means your retirement pension could be reduced. Also, taking out a reverse mortgage now may reduce your ability to get another loan for the security of your home in the years to come.
Do you need legal or financial advice before taking out a reverse mortgage?
Most financiers offering a reverse mortgage loan require that you seek independent advice at your expense from an attorney, financial planner, and accountant prior to taking out the loan. The total cost of this consultation can range from $ 1,000 to $ 2,000.
It is important to note that not all lawyers, financial planners, and accountants are ready to provide the independent advice a financier needs from you.
What if you die or when it’s time to sell your home?
If you have to move into geriatric care in the future and decide to sell your own home, your repayment obligation will reduce the amount that you have available as an initial contribution to the geriatric care facility.
If your home is your main asset after your death, most (or even all) of the inheritance that you would like to pass on to your children goes to the financier of your reverse mortgage instead.
Protection for homeowners prone to deception
Under the new banking code of conduct, banks must be extra careful with customers who may be at risk, including those affected by violence against the elderly.
Real estate investment
Stacks law firm
The content of this article is intended to provide general guidance on the subject. Expert advice should be sought regarding your specific circumstances.