COVER STORY
It’s the great Australian home dream – in reverse Many Baby Boomers are finding themselves asset rich and cash poor in retirement. RUSSELL HUNTER investigates the concept of a reverse mortgage to fund the comforts without forfeiting the home.
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ou can’t eat the family home. It’ a truism increasingly confronted by the Baby Boomers who, in their golden years, discover themselves asset rich and cash poor. Having come to the compulsory superannuation table slightly late, they may find themselves short of retirement cash. They may occupy a high-end home, all mortgages paid, with children ready to inherit. In many cases that home may well have been in the family for generations. Selling outside the family is just not an option. That said, a couple can’t live on the age pension, at least not with any degree of comfort. And comfort is the one thing that we crave in our golden years.
So people of that age group have started to explore ways to release some of the value of their assets – usually the family home – without having to dispose of them completely. That’s where the reverse mortgage system comes in: You can borrow a portion of the value of the home and pay it back – with interest – when you die or the home is sold. And if that sounds too good to be true, it isn’t. But there are pitfalls. Reverse mortgaging is not for everybody. Already popular in the US, the reverse mortgage concept is now taking hold in Australia as a means of releasing the equity tied up in a home. It allows individuals and couples to stay in their homes while “selling” a portion of them.
The attractive aspect is there are no monthly mortgage payments. The loan is repaid plus interest when the owners die or the property is sold. As you grow older, you are able to borrow up to a higher amount. As a general guide, 60-year-olds may be able to borrow around 20 per cent of the value of their property (20% LVR), while 70-yearolds may be able to borrow around 30 per cent (30% LVR). Different providers allow you to borrow different amounts using their reverse mortgage home loans. Do your homework carefully to find the right loan for you. You could potentially borrow up to 45 per cent of the property’s value. But the golden rule, as always, is shop around. A simple internet search will bring up a bewildering array of lenders eager for your business. Most are up front about the risks and pitfalls and most won’t even entertain you until you can show that you have acquired expert advice. If the lender you are looking at doesn’t insist on this, perhaps you should be looking elsewhere. Advice can come from a CPA, a solicitor or a licensed financial adviser. It’s an essential step. The same internet search will also bring up the Canstar comparison site which will serve as a useful point of departure, but don’t rely on it. Do your own research. You’re highly unlikely to find a fixed rate for a reverse mortgage. Private sector loans, even in these days of near-zero official rates, currently carry variable rates at around the 6 per cent mark – which indicates the risks the lenders see
themselves exposed to. And there will typically be fees. These vary but an establishment fee of $900 with annual management fees of $80 would not be abnormal. The game changer for many would be the entry of Centrelink into the reverse mortgage arena in mid-2019. It’s an innovative way of using public money to make life more liveable for pensioners, many of whom would own their home or be close to owning it.
“The game changer for many would be the entry of Centrelink into the arena.” And because it’s public money, the rules and procedures are a little bit more complex and time consuming. There’s a fair bit of what many might call red tape. Centrelink expert Narelle Cooper, who with her partner has a business specialising in helping clients navigate the Centrelink maze, has thoroughly studied the Centrelink concept and has already piloted a number of clients through the rules and procedures. “It’s not for everybody,” she says. “But it can be very useful for people in specific circumstances.” The interest rates tend to be a bit more attractive than those offered in the private sector. There are no establishment
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