WELCOME to MONEY for SENIORS

If you have been retired for several years you may be facing a significant reduction in your savings, resulting in your having to accept a lower standard of living. However most retirees own their home outright, it is growing in value, and often holds the solution to their problems.

Many seniors love their family home, and yet they move because they lack a relatively small amount of capital for maintenance or alterations to make it more "ageing person friendly".

Some move to a Retirement Village for an environment that suits their current frailties, but that decision could result in a loss of 30% of their purchase price over the first five years.

Others will move because they cannot afford the regular maintenance of the property. However a relatively modest monthly drawdown on the home's value could solve that problem.

Most typically, other seniors sell their home to move to something smaller, thus releasing some cash for an overseas trip, a new car, or cash in the bank.

A Reverse Mortgage is an alternative way to look at all these issues.

What is a Reverse Mortgage?

A reverse mortgage is a loan provided to homeowners generally over 60 years of age. The loan is secured by first mortgage against the borrowers' home. The main feature of this type of loan is that, subject to conditions, it is not required to be repaid until all borrowers permanently vacate the property, move to long term aged care, or they die.

Typical features of reverse mortgages :

Loan Monies

Funds advanced to the homeowners may be via a lump sum, a series of instalments, or a combination of both. The total amount which may be borrowed will vary from lender to lender, however as a general guide, a person of 60 years may borrow 15% of the value of their home, whilst a 95 yr old could borrow 50% of the home's value.

Interest Rates

Lenders offer loans at variable rates, fixed rates for specific terms such as 5 years or 10 years, a combination of both, and fixed for the life of the loan. Generally speaking, interest rates for reverse mortgages fall in a range of 1% - 1.5% above the rates for prime loans in the traditional mortgage market.

No Regular Repayments

The borrowers are not required to make any repayment of principal or interest over the course of the loan. Interest is added to the loan balance, and subsequent interest is charged on interest already accrued. For example, a homeowner borrowing $100,000 as a lump sum, at a fixed rate of 9%, would have a loan balance of about $245,000 after 10 years. This would be without drawing any extra funds, or repaying any of the principal or interest during that time. However, whilst no regular repayments are required, lenders will accept voluntary repayments.

No Negative Equity Guarantee

It would be possible, in certain circumstances, for the rolled up debt to overtake the value of the home. For this reason, lenders restrict the amounts which can be borrowed to relatively low percentages of the home's value. When a loan balance exceeds the value of the home, the homeowner is said to have "negative equity". Lenders, that are members of the Industry Body called SEQUAL, are required to provide borrowers with a "No Negative Equity Guarantee". This means that the total loan balance repayable by the borrowers cannot exceed the net realisable value of the property at the time the loan is repaid.

Inheritance Protection Option

Some lenders offer the ability to protect a portion of the future realisable value of the property. This ensures that a fixed percentage of the future property value will be available to you or your estate irrespective of the loan balance at that time. For example, if a borrower wanted to ensure that 20% of the property value was still available, the lender would structure the loan based on only 80% of the property's value at the time of offering a loan.

Legal, Financial and other Advice

Most lenders will require that borrowers seek both independent legal and financial advice. They will also be encouraged to discuss their plans with Centrelink to clarify whether the loan will have any impact on their pension payments. Borrowers with family beneficiaries are also encouraged to discuss their plans with them.

Loan Terms and Conditions

Lenders terms and conditions will vary, but typically will require the borrower to :

Adequately maintain the property.
Maintain an adequate level of insurance on the buildings
Notify the lender of any change in the structural integrity of the buildings.
Notify the lender if any additional permanent residents have moved in.
Allow access for lender's revaluations of the property each 3 to 5 years.

It is essential for the borrower's solicitor peruses the contract thoroughly and ensures that the borrowers fully understand all of their obligations.

Some Common Applications for a Reverse Mortgage:

Supplementing current income with an additional regular income.
Purchase of a new car.
Funding an overseas holiday.
Raising funds to allow earlier intervention for medical procedures.
Paying for Home Renovations.
Paying out an existing mortgage, which requires regular repayments.
Funding ongoing home care and home maintenance.
Funding an Accommodation Bond to an Aged Care Facility.
Pre-payment of funeral expenses.
Assisting a family member in need.

Some Benefits of a Reverse Mortgage:

Borrowers retain the Title to their own home.
Borrowers continue to live in their home as long as they choose.
Funds received may not be taxable nor reduce pension payments. However Centrelink advice is essential to establish borrowers position regarding pension entitlements.
Borrowers in high growth suburbs continue to receive the benefit of capital gains on their home.
Any proceeds in excess of the loan amount belong to the client or their beneficiaries when the loan is paid out.