Reverse mortgages and debt free equity release products can give you access to your wealth now, but there are a few things you should know first.
Are you asset rich, but cash poor? What you need to know.
There are over 20 reverse mortgage products on the market, with around 20,000 Australians taking them up. ‘Blowing the kids' inheritance' has become something of a catchphrase in recent times, but it is no reflection on reality. Few Australians over 55 have excess cash or savings because the biggest asset is usually the family home - and they're living in it.
What remains is we are going to live a long time, so we will need a stream of cash and somewhere to live. What to do? A village community is one option, but not the answer for everyone. Reverse mortgages and debt free equity release products can now give you access to your ‘wealth,' but there are a few things you should know.
The reality is that increasingly tight budgets over a lot of years means there is little cash to casually spend on ‘luxuries.' Banks and other financial institutions have been quick to catch onto this phenomenon and have come out with new products that allow customers to borrow against their real estate assets. The most talked about are reverse mortgages and ‘debt-free equity release' products.
The principle of reverse mortgages is simple enough: you borrow cash against the value of your home and you don't have to make any repayments until your home is sold, you move into an aged care facility, or you die. You don't pay interest or fees; they are added to the loan.
How much can you borrow?
As a general rule, you are able to borrow between 15 and 40 percent of the value of your home, provided you are 60 years or older and you own the home outright. Generally, the older you are the more you can borrow.
Advantages and benefits
- You free up cash that is otherwise tied up in the value of your home.
- You can use the cash in any way you like.
- You can take a lump sum or a regular stream of income.
- You usually don't have to make any regular repayments while you live in your home.
- You get to stay in your home and retain ownership.
- Interest is usually higher than normal home loans.
- You have to maintain the home in a good state of repair to comply with the conditions of the loan.
- Depending on how much you borrow, the loan may affect your pension (you can check with the Centrelink Financial Information Service or the Department of Veteran Affairs).
- Most loans are based on compound interest (interest charged on the interest), which means that your debt can build up quickly.
- Reverse mortgages can, in some cases, double within 10 or 15 years.
- Unless your reverse mortgage has a ‘no negative equity guarantee,' there is a risk that the amount of the loan may increase beyond the value of your home and you will be responsible for the shortfall.
On the other hand, there may be positive factors, such as rising land prices, which could counter-balance some of the risks. As with any form of financial commitment, doing your homework and seeking professional advice before signing any contract is highly advisable.
Debt-free equity release
With a debt-free equity release you don't enter a loan agreement or pay cash. Instead you sell part of your house. It's not a loan; you continue to live in your home for as long as you wish. When you decide to sell, you receive the market value of your home - less the amount owned by the equity release provider. You can receive up to $500,000, depending on the value of your home and your age (you must be over 60 years) and you use the cash any way you wish.
What if you sell earlier than expected?
Your share may actually increase because the equity release provider has to wait less time for their share of the proceeds. If you sell your home at a higher price than expected, you will often share the extra on an equal basis.