Should you consider a reverse mortgage or equity release? Retired actuary John De Ravin explains two key financial strategies that can help homeowning pre-retirees and retirees boost their retirement income.
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wo strategies that can boost homeowners’ retirement income are the reverse mortgage and equity release. Here’s what you should know about these schemes.
A reverse mortgage Read this strategy if: • you are retired and own your own home with little or no current mortgage, and you would like to boost the amount of cash you have available for current spending • you are happy to use some of your home equity, recognising that this will diminish the size of any estate that will ultimately be inherited by your beneficiaries.
by about 1 per cent for every year of age. So, for example, if you take out a reverse mortgage at age 70, lenders may be prepared to lend about 25–30 per cent of the value of your home. ASIC has a reverse mortgage calculator available on the MoneySmart website.
Factors to take into account before you decide Given that a reverse mortgage generally allows you to live a nicer life but at a cost to your estate, a question you might like to consider is the legacies you would like to leave to your beneficiaries.
Some retirees are quite Since legislation was introduced in Some retirees are quite happy to September 2012, the lender is not happy to go on SKI go on SKI holidays (‘spend the permitted to recover any money kids’ inheritance’) but others are holidays (‘spend the from you (or your estate) other determined to leave bequests for than the proceeds from the sale of kids’ inheritance’) but their children, relatives, friends, the home even if the proceeds of others are determined to charities or other beneficiaries. If selling the home are less than the you own your house and manage outstanding balance of the loan. leave bequests. to get by on the Age Pension (and Because of this ‘no negative equity’ whatever other assets you may guarantee, the interest rate is higher own), then you will always leave the family home to than banks would normally charge on a home your beneficiaries. If you take out a reverse mortgage, mortgage. Currently (April 2021), typical reverse depending on how much of the mortgage you draw mortgage interest rates are in the vicinity of 5 or 6 on and how long you remain in your home before it is per cent at a time when standard mortgage rates sold, it may be that little or no equity in your home will are typically in the vicinity of 2 to 3 per cent. remain to be inherited by your beneficiaries. Also, because the lending institution is aware that you don’t have much capacity to repay the loan and Also, if you are receiving the Age Pension, there may be an impact on your pension entitlement. The reverse the loan amount will accumulate with interest until mortgage drawdowns themselves are not counted as you move out or pass away, the lender will only be income for the purpose of the means test, but if the prepared to lend a relatively small percentage of the borrowed money is then held as a financial asset (such value of the home, nothing like the 80 per cent that lenders may typically lend where regular repayments as in a bank account), then the money in the bank account (apart from the first $40,000 for the first 90 of principal and interest are being made. days after you draw down the loan) is counted as an According to the ASIC MoneySmart website, lenders asset for means testing purposes. will typically be prepared to lend 15–20 per cent of Read the complete article here or buy Slow and the value of your home if you take out the reverse Steady from John De Ravin’s website. mortgage at age 60, but that percentage increases 14
YourLifeChoices Retirement Affordability Index™ May 2021
