Alternatives to a Reverse Mortgage

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Alternatives to a Reverse Mortgage Peter Horsfield

With the increasing prices of property and rising cost of living due to inflation, today more and more retired Australians are finding themselves asset rich while at the same time growing evermore cash flow poor.

These factors combined with our emotional attachment to our home i.e. family memories, estate for children, etc… has inspired ever more creative lending products. One such lending product is called reverse mortgages.

With a reverse mortgage the borrower give their title of property to the lender in return for up to 45% of their homes value received as either an income stream or lump sum payment. While no repayments are required (as they are capitalised on top of the existing loan balance), the outstanding balance (sum + accrued interest) is repaid either on death or sale of home when ones goes into a retirement home.

Unfortunately rather than a solution to cash flow poor retirees, I see this particular product as a wealth destructor with significant impact on the most vulnerable members of our society.

Over 20 years, your debt will grow from $50,000 to $272,060 (540%+ more than your initial borrowed funds). Reference from CBA Key Information About Reverse Mortgages. Reverse Mortgage Information Statement

The following risks particularly apply to reverse mortgages. Referenced from The Australian Tresuary Department

  • Interest rate risk – that interest is capitalised, leading to negative equity or insufficient equity to cover the cost of future needs
  • Property value risk – that the borrower’s equity in the home may be eroded more quickly due to, for example, unexpected falls in property values, reducing the equity available to the borrower after they have entered into the contract
  • Longevity risk – that the borrower may have ongoing financial needs longer than expected
  • Information asymmetry risk – that borrowers currently may not be able to readily access information regarding the long-term costs of a reverse mortgage and how it may affect their ability to meet future financial needs.

In addition risks

  • Interest rates are generally higher than average home loans by up to 2%+pa
  • Potential impact on pension eligibility
  • If you are the owner and someone else lived with you they may not be able to stay when you die.
  • Break costs to the loan contract can be very high.

Alternative options

Sell and downsize and invest the sale proceeds into an income producing investment to fund your needs.

Sell your home to your children/beneficiaries. In return pay children rent, if children borrow to fund the purchase they may also be eligible to receive tax deductible benefits.

Senior home owner grant. An option agreement for an investor to buy the property at an agreed price today, whilst allowing the owner to remain in their home until they die or move into a nursing home.

 

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Peter Horsfield founder of SMARTadvice has provided tailored solutions to individuals from 1998.

He has been a Certified Financial Planner since 2003.

Peter was recognized 2007, 2008 and 2010 as National Advisory Practice of the Year in Australia.

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About Author

peterhorsfieldcfp@gmail.com'

Peter Horsfield founder of SMARTadvice has provided individual tailored solutions to individuals from 1998. Achieving Certified Financial Planning designation in 2003. The CFP certification is the highest level of certification that a financial planner can achieve. Internationally recognised, the CFP marks represent standards of excellence and demonstrates to the public and peers, his commitment to financial planning. In 2005 Peter was appointed Managing Director of FMW Financial Planning and grew the business to become recognised 2007, 2008 and 2010 as National Advisory Practice of the Year. Peter founded SMARTadvice with the desire to deliver both tailored and effective advice for individuals with inbuilt flexibility and value. Peter brings with him a wealth of academic and business achievements and experience in creating a unique and best advice business model that put client’s interests first. Certified Financial Planner (FPA Member) since 2003 Self Managed Superannuation Fund Specialist (SPAA Member) since 2009 Diploma Financial Advice (SIA Member) since 1999 Founder FMW Financial Planning Pty 2005 Financial Services since 1998 Trusted Advisor (Values Based Financial Planning) 2010

1 Comment

  1. markjoespeh24@aol.com'

    Thanks for the article. For a senior home owner grant, are there any standard qualifications that one must meet before applying for these types of grants? I’m interested to find out.

    Thanks.

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