REVERSE MORTGAGE HOME LOAN - A word of caution

The Reverse Mortgage enables asset rich, but income poor home-owners who are over 60, to borrow funds against the equity that they have built up in their home, while still being able to live in the home.

No repayments are made and the interest and fees on the loan capitalise.

If the borrower moves out of the home or dies, the borrowed amount plus the capitalised interest becomes due and the lender will then sell the property and recoup the amount due. The remaining funds will go to the estate.

Most Reverse Mortgages have a variable interest rate about 0.5 - 1% higher than the standard variable rate. So in an environment of rising interest rates, borrowers need to be aware that the compounding effect of the interest charges and fees capitalising (adding back onto the loan amount), can cause the loan to balloon to unforeseen levels in a very short period of time.

Another issue to be considered is whether or not we are in a deflationary environment, which means the house actually decreases in value. When re-valuations are conducted on these loans, if the value falls below the required level, the bank may re-call the loan.

Features of a Reverse Mortgage:

• Maximum amount available to borrow ranges between 11% - 45% of the value of your home, and the younger you are, the less you can borrow within this range

• Most lenders that offer this product require the borrower to take this as a lump sum

• Can be used for any purpose

• Repayments are allowed

• May allow you to redraw funds

Benefits of a Reverse Mortgage:

• Allows asset rich, income poor home owners access to the equity in their home in the form of cash

• No repayments are required

Important things to consider and discuss with your Financial Planner:

How does this affect your Government Entitlements if you take a large lump sum? You may become subject to the deeming rules under income tests.

Would it be better to sell the home to the children if they could fund it, as you would get the full equity from the home rather than a small portion, and then use those funds in a planned manner to support your retirement?

You need to talk to your adviser about this as well any impact upon Government Entitlements.

A reverse mortgage may affect you eligibility to get into a Retirement home if this becomes necessary.

Other Options Available

Depending on your situation, a better option may be using other lending products which utilise a lending umbrella for “family” lending. This allows family members to help out the parents by giving an income guarantee to allow them to get a loan to fund their retirement without having to sell the home.

For more information about these facilities talk to our Finance Manager as this is your future you are risking!

Information contained on this website is general financial product advice and does not take into account does your individual investment objectives, financial circumstances or needs. Information provided on and available from this site does not constitute financial, taxation or other professional advice and should not be relied upon as such. Mainview Securities Pty Ltd recommends that, before you make any financial decision, you seek professional advice from a suitably qualified adviser.

Authorised Representatives of Mainview Securities Pty Ltd may hold interests in financial products that they recommend to you. Complete disclosure will be made about such interests in any advice that is provided to you by the Authorised Representative.

Please refer to Mainview Securities Pty Ltd Financial Services Guide