Reverse mortgage or equity release – expect to hear a lot more of these terms in the future.
Why? Because the prevailing winds suggest unless Commonwealth Bank ATMs start shooting out free money again, senior Australians are ready to use their homes as ATMs to fund their retirement.
Many people approaching retirement never had the benefit of lifelong superannuation and some will clearly face a funding shortfall.
And with almost 75 per cent of the wealth of those over 60 being held in home equity, the temptation to tap into this equity exists.
The product is neither good nor bad, but it’s certainly not for everyone and its use should depend on your circumstances.
The most important issue is having a full understanding of what a reverse mortgage entails and in the past it’s been found many people using a reverse mortgage haven’t understood it.
It allows the homeowner to borrow against the value of their home without the need for immediate repayments.
Repayments are due when the property is sold, often through the estate when the owner dies.
Of course the kids might be howling at the idea of receiving less inheritance than they expected, but ignore their whinging and consider the problems you might encounter.
When releasing equity, the amount released begins to compound, it’s not just the $80,000 you might have released which needs to be repaid; it’s also the interest compounding on that amount.
No one knows their lifespan and the consequences of this can be felt if you have to enter an aged care facility.
Having to sell your home to afford a bond, you may find little equity remaining.
And the assumption your house will continue to appreciate in value, protecting you from this scenario, is dangerous.
Always attempt to understand the worst case scenario when using a finance product, especially when it has recourse to the roof over your head.
Peter Mancell is a director of Mancell Financial Group and FYG Planners AFSL 224543. This information is general in nature and readers should seek professional advice specific to their circumstances. If you want help with your financial future, we think we’re Australia’s top financial adviser. We think we’re the best financial advisers in Tasmania.
