Should I reverse mortgage now?
According to a recent survey by a reverse-mortgage sector group, SEQUAL, about four out of five people over 60 have heard of reverse mortgages. Yet less than half - two in five - understand how they work.
The lenders’ survey of 1000 seniors showed that about a third expect to rely on their home to top up their retirement funding. Most thought they would be forced to downsize their home to obtain access to their home equity.
They were looking for as little as an extra $300 a month to live on. As a spokeswoman for the lenders noted, it is not worth selling a house for such a small amount of additional income.
This lack of understanding about the options that can boost retirement income and how reverse mortgages work is backed up by a report released last year by the Australian Securities and Investments Commission.
The commission interviewed 29 borrowers and found a worrying lack of understanding of the product’s complexities. Retirees had difficulties budgeting with such large access to credit and expressed concern about whether there would be enough equity left in their home to fund them when they needed to enter a nursing home. At a time when interest rates are climbing, that last concern is particularly pertinent.
One borrower with a reverse mortgage said it was like having a credit card with a $100,000 limit and no repayments.
Others said they had found it difficult to resist the constant availability of credit. A small number expressed regret about how they had used their reverse mortgage and how quickly they had exhausted the funds they had borrowed.
Retirees are also concerned about how long the money will last should they go beyond the average life expectancy, as well as what will be left for their children.
According to ASIC, most people don’t know what the loan will cost them over its life. More than half did not know what would happen if they breached a loan condition.
So what impact will rising rates have? Infochoice’s Denis Orrock says many reverse mortgages carry a variable rate that can go up as well as down. Currently the rate is about 10 per cent a year, which is about one percentage point higher than the average standard variable rate. He says as the interest payments are capitalised at a compound rate, the debt mounts up quickly. He advises borrowers to stick to a low loan-to-value ratio, especially for those between 60 and 70. The LVR should never get above 50 per cent at any age.
Borrowers need to build escalating interest-rate rises into their calculations and work out how these will build up the debt on the house over their remaining years to see how the equity in the house declines.
Most importantly, they need to be realistic about how their property will appreciate. Not all property prices will rise and it will depend largely on the area in which you live. Price growth may be flat in your region or the value of your property may even decline.
The consumer interest group Choice adds some further tips: use only a licensed adviser to minimise the risk of being taken for a ride by a commission-driven salesman, and check all fees as well as what happens if you breach a condition.
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