Reverse mortgage comes with danger
THE family home remains the single most important asset for many of our over-55s. However, they lock up large amounts of capital, money that would be very handy in retirement.
Reverse mortgages let seniors unlock this home equity without the need to sell up or move out of a much-loved property, though the extra cash can come with a mounting interest bill.
The idea behind reverse mortgages is that older homeowners can cash out part of their home's value, with the funds received either as a lump sum, a series of cash payments or a combination of both. The money can be spent however the homeowner chooses, be it to buy a new car, take a holiday or simply meet living expenses.
Interest rates vary widely and do tend to be higher than for standard home loans. At present you can expect to pay anywhere between 6.4 per cent and 9.5pc, depending on the lender and loan.
A strong point of appeal with reverse mortgages is that no repayments are required until you sell the property or die. However, interest is charged from day one, so it doesn't take very long for the overall debt to escalate, potentially outpacing the increase in your home's value.
To see just how quickly the debt can snowball, let's say that a retiree aged 65 takes out a reverse mortgage, receiving an initial lump sum of $50,000 at the start of the loan, with a further $500 a month paid for the first five years. By the time the homeowner is in his or her mid-80s, the debt plus interest will have grown to $400,000.
The mounting debt may alarm family members, but it should also concern our homeowner.
That is because around 50pc of both men and women currently aged 65 have a 50pc chance of living to their mid-80s. To help seniors understand exactly how a reverse mortgages works, investment regulator ASIC has produced the booklet, 'Thinking of using the equity in your home?'
It is a very comprehensive guide, with some input from yours truly. Download a copy from ASIC's consumer website FIDO: www.fido.gov.au; or phone 1300 300 630.