Reverse mortgages. A solution to the asset rich, cash poor trap
Retirement is a time to tap into every available financial resource, and if you’re a home owner who falls into the “asset rich, cash poor” category, a reverse mortgage can hold appeal.
Over the next 40 years an estimated 7 million Australians are expected to start living off their super savings. Many simply won’t have enough to enjoy a comfortable lifestyle. The benefit of a reverse mortgage is that you can access money to live on without having to sell your home
No ongoing repayments
A reverse mortgage is a loan that lets you draw down the equity in your home. It’s a product that is typically available once you reach age 60, and while no monthly repayments are required, full loan repayment falls due when you sell your home or pass away.
Limits do apply to the amount you can borrow with a reverse mortgage. You won’t be able to borrow the full value of your home – but rather a percentage, and the older you are, the more you can borrow. As a guide, a 60-year old can often borrow 15-20% of the value of their home. An 80-year-old may be able to borrow 35% of their home equity.
Understand the drawbacks
Turning to the family home to supplement your retirement income can make financial sense though it good advice is a must to be sure it is the right choice for you. The payments from a reverse mortgage can be taken as a lump sum (though this can impact age pension entitlements) or as a series of regular payments or a line of credit, providing extra money to live on.
On the downside, loan interest is charged from day one and the mounting cost can outpace the growth in your home’s value.
By law, you can’t end up with “negative equity”- where you owe more than your home is worth. Nonetheless, for many Australians, a key stumbling block of reverse mortgages can be the impact on your estate. No, you won’t be able to bequeath the full value of your home to your adult children or other family members. But I’m sure your loved ones wouldn’t want you to live a lean retirement just so that you can provide a generous legacy.
How to maximise value
The key to managing a reverse mortgage is not to over-borrow. This type of product works best when you draw down small annual amounts, and a few thousand dollars extra each year in the kitty can make for a much better lifestyle.
Good advice is essential
I still believe super is a great way to save for retirement, but if you’re a home owner, the availability of reverse mortgages means you shouldn’t have to live a meagre existence once you exit the workforce.
That said, it is critical to talk to your solicitor about the possible legal implications of using a reverse mortgage. And be sure to discuss your decision with your family.
Above all, contact my office for tailored advice. Tapping into home equity should generally be a last resort. Once you’ve exhausted this option there may be few choices left to fund your retirement – and looking ahead, your aged care needs. We can ensure every possible strategy is considered before you rely on the roof over your head to enjoy a fulfilling retirement.