Some confirmation of the increasing trend arrived last week when stats out of Canada showed a big jump in the uptake of reverse mortgages.
Canada’s sole provider of reverse mortgages, HomEquity Bank, said in the fourth quarter of 2011 it closed on $67.2 million of reverse mortgages.
A record number and up 42 per cent on the fourth quarter of 2010, while uptake in 2011 increased 16% on 2010.
Now you’re probably saying, “that’s Canada, they have moose and bears and a lot of snow, hardly comparable to Australia”.
However, both countries share similarities in their demographics, resource based economies, political systems, addictions to debt and according to some, they have the last two housing bubbles standing in the world.
Debt to disposable income hovers around 150% for both countries while mortgage debt to Gross Domestic Product pushes over 90% for the pair.
While this sounds scary, the scary part revolves around seniors extracting equity from their homes exactly at the time those homes appear to be declining in value.
Reverse mortgages work on the assumptions that houses never lose value and the owner isn’t expecting to have a very long life!
As I’ve said before, no one knows their lifespan and the consequences of this can be felt if you have to enter an aged care facility.
And let’s not consider the nightmare of property prices potentially continuing their decline while interest continues to chew up equity in a home.
The other concern is any change of plans becomes harder after taking out a reverse mortgage.
Staying in your house may be a dream, but downsizing may prove more practical and any sale will release equity regardless.
This opportunity may be lost after a reverse mortgage has been running, so an asset rich/cash poor retiree may eventually find themselves asset poor/cash poor.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL / ACL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. Need help with your financial your financial future, we think we’re Australia’s top financial adviser.
