Reverse mortgages and your retirement
If you are heading to retirement and are asset-rich but low on cash, you may be able to access the equity in your home without finding somewhere else to live.
Cynthia was 67 and owned her own home worth 2 million dollars.
It needed some updating in the Kitchen and the Bathroom as well as a few repairs. She wanted to fix things up to be comfortable and she would also like to do a bit of travelling.
Cynthia's husband had died several years ago and she had no income other than her pension. So she could not afford to have a loan where she had to make repayments.
We were able to get Cynthia a $250,000 Reverse mortgage. She did not have to make a repayment or payback the loan unless she chose to sell the house, move out or she died.
Cynthia spent $80,000 on Fixing the house.
She put $80,000 away so she could go on overseas holidays for the next 7 or 8 years if she wished
And she used the remaining $90,000 to supplement her pension over the next 7 or 8 years.
She was planning to downsize into a retirement village about then and would be able to sell the home when it suited her and pay the loan and accrued interest from the Sale. Still leaving her plenty of money to buy into the retirement village.
If she decided to stay where she was, then that was OK too. It was her choice.
Cynthia now had options!
So lets look a bit closer to see if this would suit you.
What is a reverse mortgage?
A reverse mortgage is a home loan that allows the owner to receive cash payments or a lump sum based on the equity in their home. This means you are borrowing money against your home equity. You are also not required to repay this money until the home is sold, at which point the sale proceeds are used to repay the loan.
This option can provide a much more comfortable retirement. The payments or lump sum from a reverse mortgage act as an additional income, meaning you don’t have to rely solely on your superannuation or pension.
You can live in your home as long as you like with a reverse mortgage and don’t have to make any repayments during that time.
The amount you are required to pay back is also capped at the value of your home. So if you do stay in your home till you are 110 the payout of the loan cannot exceed the sale value of your home and leave your estate with a debt.
The loan must be repaid in full, either when you sell the house or if you die. Interest is also charged and is added to your loan balance to be paid when the property is sold. These interest rates tend to be a couple percent higher than a normal home loan, so this needs to be accounted for when calculating a loan amount. It is a requirement that we work this out for you and give you an idea of what the costs and payouts will be at various time frames, before you go ahead.
You also need to be aware that if you are a sole homeowner, any other people living in the property may have to vacate when the loan needs to be repaid.
It is best to get a Financial Adviser to go through any affects this may have on your Centrelink payments. Sometimes funds can come as regular payments instead of a lump sum to reduce any effect. Matching up your financial needs to your life expectancy would be a good idea.
The amount you can borrow will depend on your age. You must be retirement age to apply. Its nice to have options.
The Following is a Government Information sheet available at https://www.legislation.gov.au/Details/F2013L00814