Reverse Mortgages – Are they always a good idea?
The ‘exciting new product on the market’ being promoted by banks have many pros and cons. The equity-release concept is gaining traction as the number of people reaching retirement age increases. The chief executive of Senior Australians Equity Release Association of Lenders, Kevin Conlon, says that it might mean more seniors will have more comfortable lives. He says about $350 billion is stored in the homes of the over-65s and the house represents about 70 per cent of their personal wealth (Sydney Morning Herald June 4, 2011).
But what are the implications? Reverse mortgages or home-equity loans let you ‘tap into’ the hard earned equity in your home in the form of either a lump sum payment, regular cash payments, a line of credit or a combination of all three. This option can be practical and logical in that it can help with cashflow after retirement particularly to access money for home maintenance, upgrades, or even a well earned holiday. However, it can also be problematic and not always the best option available to you.
What happens if after a few years you need to move to a retirement home as you can no longer maintain or upkeep your home and to do this you need to sell your home. Without realising it, in preparing to sell your home you notice that once you take into account your break fees your reverse mortgage has eaten away at the equity in your home and there is not as much there as you thought; you now cannot afford buy into a retirement home and have enough money left over to live comfortably or even pass on an inheritance to your family.
Reverse mortgages can be a great option and a blessing for some and a decision to regret for others; they are not for everybody. There are many factors that you need to consider when deciding whether or not the option is for you such as interest rate and property price projections, differing life expectancies, aged-care and housing needs, compounding interest, pension and tax implications and various terms and conditions.
Entering into this arrangement with a bank is a very important decision; be sure you understand all the implication of home-equity loans and before signing, seek advice from:
- a financial planner to see if financially this option will make sense for you and is the best option; there may be alternative arrangements more suitable;
- and a solicitor to ensure that you understand your obligations, and the full implications of the agreement.