Reverse mortgage

Excerpt from Noel whittakers newsletter..always a great read..

Reverse Mortgages
by Peter Cooper
Often as we grow older and our cashflow diminishes we could do with a
little extra money to
– paint the house
– make general repairs and replace old appliances as they wear out
– employ someone to mow the lawn and tidy the garden
– take a holiday
– buy a new car
As an older person you may own your home outright, but sometimes you
may find that the pension or your other income does not stretch far
enough for your needs. If you sell your home, you’d be forced to rent and
you’d also lose what is probably your largest single asset. You can’t
take out a normal loan, because you don’t have the capacity to pay it off.
‘Reverse mortgages’ could be one way to meet this problem.
What are reverse mortgages
Reverse mortgages allow older people to borrow money to live on without
having to make any repayments until they sell their home, move into
care, or until the last borrower passes away. Each year the fees and
interest you would ordinarily pay are added to the loan.
Over time, you’re charged interest on the interest, or compound
interest, and that builds up the total amount that you owe the bank. When the
loan ends and your home is sold, you or your estate must repay the
outstanding debt to the lender.
Here’s an example
Suppose you borrow $100,000 (including fees and charges) at an interest
rate of 8.07% per year. Here’s what you could owe at the end of various
periods.
Time What you or your estate could owe*
5 years $147,400
10 years $217,300
15 years $320,300
20 years $472,200
* rounded to nearest $100, assuming 8.07% interest applies throughout
Interest rates may increase during the life of a variable rate loan, so
you could end up owing more. This does not include establishment fees
of $750 or administration fees which can be around $10 per month. These
fees and charges may be capitalised to the loan.
On the other hand the impact could be reduced if:
your home increases in value, or
you make additional voluntary repayments to the loan.
What are the rules?
You must be an owner/occupier
Loans are based on age group and both partners must be over 63
63-69 Minimum of $10,000 and a maximum of $150,000 or 15% of the value
of your property
70-79 Minimum of $10,000 and a maximum of $200,000 or 20% of the value
of your property
80+ Minimum of $10,000 and a maximum of $250,000 or 25% of the value of
your property
Repayments may be made upon the death of the last surviving borrower
from the estate or repayments may be made at any time during the term of
the loan.
Advice requirements
In the right circumstances, a reverse mortgage may prove a useful
product for some retired people. However, this kind of loan can have some
important long term effects on your finances. That’s why responsible
lenders offering reverse mortgages ask you to obtain advice if you are
interested in the product.
Take time to consider carefully your likely financial needs in future
as well as the impact on your family. It can be a delicate issue to
balance your need for some cash now against possibly cutting off other
financial options later in life. If your home is your only significant
asset, then borrowing against it may reduce your future choices. A reverse
mortgage may also significantly affect how much money you can leave to
your children or other people when you die and that’s why the executors
of your will and your immediate family must also be notified.
Who should advise you?
Make sure you discuss with a lawyer the terms and conditions and
clearly understand what you’re signing up for.
Talk the idea over with your financial adviser/accountant, because you
need to discuss it with someone who understands financial matters and
knows your personal needs and circumstances and can explain what it
means to you financially.
Peter Cooper is a Director of Cooper Financial Connections

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