Reverse mortgage - A solution to the asset rich, cash poor trap

If you're a home owner who falls into the "asset rich, cash poor" category, a reverse mortgage could hold appeal in retirement.

Over the next 40 years an estimated seven million Australians are expected to start living off their super savings, but 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 generally 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 pays to speak with your financial adviser to be sure this is the case 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.

However, 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.

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.

Good advice is essential

Talk to your solicitor about the possible implications of using a reverse mortgage. And be sure to discuss your decision with your family.

Above all, talk to your financial adviser. 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.

Your adviser can ensure every strategy is considered before you rely on the roof over your head to enjoy a fulfilling retirement.

 

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.

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© AMP Life Limited. This provides general information and hasn’t taken your circumstances into account. It’s important to consider your particular circumstances before deciding what’s right for you. Although the information is from sources considered reliable, AMP does not guarantee that it is accurate or complete. You should not rely upon it and should seek qualified advice before making any investment decision. Except where liability under any statute cannot be excluded, AMP does not accept any liability (whether under contract, tort or otherwise) for any resulting loss or damage of the reader or any other person.