A 'Reverse Mortgage' (equity release plan) is a loan where home equity is converted into cash and specifically designed for people over the age of 63. Essentially the traditional mortgage is flipped and the lender pays the borrower funds via either a lump sum, a regular income or a combination of both. The amount of cash the borrower receives is based on the age and the value of the property, and the borrower retains full ownership of the property and can stay in the property as long the borrower chooses.
The debt, including all interest owed, is repaid to the lender when:
- The borrower sells the property of their own accord, OR
- The borrower moves into aged care (not required with some lenders), OR
- The last surviving borrower dies
It sounds like a great concept and it is, but there are a few disadvantages to reverse mortgages.
Fees:
The loan carries lots of fees that sometimes can be close to three times as much as a traditional mortgage. Also there is interest to pay which is charged back to the loan and compounds unless payments are made (which is not mandatory).
Legacy:
You cannot leave your home to family members, the house will go back to the bank to settle the loan.
Funding:
Beware if you take a lump sum of cash. It has been noted that borrowers rather than living off of the money, will use it to pay of debt, give to their children or do something rather extravagant and then they have nothing left.
So if you are interested in a reverse mortgage do your research, it may be better for you to see your existing home and buying a less expensive property and using the difference as income.
Have you, or any relatives engaged in a reverse mortgage? What was their experience?
Anne,
ReplyDeleteA reverse mortgage may well be a cheaper option than selling and downsizing, seniors get access to funds without having to incur the costs of selling and then stamp duty (depending on which state) of buying again. It is about doing your sums to see which will provide a better result.
The house does not revert to the bank on death, it is an asset that goes to the estate however the loan will need to be paid off. It may need to be sold to do that depending on the finances of the beneficiaries and other estate assets.
One of the areas I work in is with seniors and the seniors who take a reverse mortgage do it with an understanding of the costs involved and the choices available. For many, their house is essentially their superannuation as many seniors did not have any super as it was not generally available during their working lives. The reverse mortgage gives them an option to draw down funds (equity) to support their lifestyle or even give with a warm heart to children or grandchildren when they need it rather than waiting until after death.
I have had clients use funds to be able to travel which was a dream and a reason to get up each day, other clients have used it to pay off crippling credit card debt, some to do repairs to their own home, some just to assist with day to day living and occasionally some use it to invest with.
It is an option where they did not have it previously.
I agree Greg, like with any decision about money it depends on your situation.
ReplyDeleteThanks for the updated information and I love the idea of using the funds to fulfill lifelong dreams.
Thanks for commenting, it's great to hear from someone who is actively working with clients and having great success.
My vote is to sell the house and down size.
ReplyDeleteOnce you have entered into a reverse mortgage you have lost control of your most important asset.
Have you had experience with this yourself Brenda? That is true about once you have signed the papers it would very very difficult to change your mind.
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