When it comes to funding your retirement, you may be overlooking one of your most valuable financial assets. If you own your home, a Reverse Mortgage can unlock some of the value of your property as tax-free cash. A rise in house prices over time means that for many people their home is also their biggest financial asset. Making the most of your property wealth and other assets can provide you with the funds to enjoy a comfortable retirement without the need to downsize.
In Australia, Reverse Mortgage loan borrowers are heavily protected by extensive consumer protections, which were legislated in 2012, and there has been little negativity about them, yet we continue to read incorrect and nonfactual social and media commentary.
With 20 years of advising in this specialised sector, here are the facts about Reverse Mortgages.
Borrowers remain on Title. As per any home loan, the Title is held by the lender and their interest is noted. If rates and insurances are paid when due, and the property retains its existing condition, borrowers have life-time tenancy on the property.
Borrowers have consumer protections. Reverse mortgages are protected by non-negative equity guarantee.
Borrowers can decide when to repay the loan. Reverse mortgage loans never need a compulsory payment for the life of the loan. However, they can be repaid in full, or part, at any time. Mandatory repayment is required when the property is sold, or within 12 months of the last borrower permanently leaving the property (deceased estate or residential care).
Borrowers can retain their age pension entitlements and are not liable to pay income tax. As Reverse Mortgage funds are not designed for investment purposes, there is no income generated, therefore no income tax is liable. In most circumstances borrowers will retain existing pension payments. Care needs to be taken if borrowers wish to “gift” monies to family or friends. Seeking advice from specialist Reverse Mortgage brokers is important, as lenders do not provide this service.
Borrowers need to obtain independent legal advice. All Reverse Mortgage products require borrowers to obtain independent legal advice on the terms and conditions of their loan. It is an ideal time for borrowers to prepare Wills and Enduring Powers of Attorney if not already in place. Whilst there is no mandatory requirement to include family or friends in the discussion, it is recommended to do so, to avoid any future “surprises”. It may well be that family may be able to assist without the need for a Reverse Mortgage.
Borrowers need to understand what their loan means to their future equity. Every borrower must be provided a calculator that includes the projected drawdown on funds, two sets of interest rates, and a forecast growth across 5-, 10-, and 15-year periods.
Borrowers need to discuss future needs. In its review of Reverse Mortgages five years ago, ASIC noted the need for borrowers to have an idea of their future needs and how those needs can be funded. These may include car purchase, travel, repairs and maintenance, in-home care (in addition to Government subsidies) and residential care. For most borrowers, there will still be a substantial amount of equity in their house to fund aged care and provide an inheritance to their beneficiaries. Once again specialist Reverse Mortgage advisers can discuss the potential costs of aged care.
Borrowers can choose from several lenders. Whilst mainstream lenders have left the market, a solid range of lenders will be able to meet most borrower needs. Each lender has its own Credit policies, including location of security, and use and drawdown of funds is varied. The better lenders have internet options and a Visa debit card linked to the account.
Borrowers are only charged interest on the money drawdown. Unlike other options such as “debt free” where a lump sum is the only option, a Reverse Mortgage facility can be drawn when the borrower requires the funds. Borrowers are only charged interest on the amount outstanding, there are no charges on unused funds for most reverse mortgages. A Reverse Mortgage facility can include a lump sum, an income stream, a Line of Credit, or a combination according to need.
In conclusion, it’s true that not all retirees require the funding of a Reverse Mortgage loan to assist them with their cost of living in retirement. But for those who have paid off all or nearly all of home debt, there is the opportunity to access a part of the significant growth in their home since purchase. In doing so, it may provide a retirement lifestyle many just dream about.
All images: Getty Images
This is a sponsored article produced in partnership with Reverse Mortgage Finance Solutions.