why arent reverse mortgages offered to all people? why cant I release equity like a reverse mortgage?
Hi Myla
Reverse Mortgage - mortgage loans where the balance gets bigger over time instead of smaller, are a tightly regulated specialist lending product:
http://www.asic.gov.au/fido/fido.nsf/byheadline/Reverse+mortgages?openDocument
In theory, a credit facility secured by mortgage over residential property can imitate a true reverse mortgage product, but it will not have the same safeguards as a regulated product.
Reverse mortgages usually have an equity buffer built in to the loan. The equity buffer is scaled according to the age of the borrower, and has a capped limit, usually guaranteeing that at the end of the day the amount outstanding on the loan will not exceed 80% of the then value of the property.
This buffer is to provide peace of mind to borrowers that there will be some value left in their estate to pay necessary funeral expenses, selling costs of the property and legal and probate expense.
Many older Australians who own their own homes are living below the Henderson Poverty Line. After a life time of work, they cannot afford to live and maintain their properties.
The reverse mortgage industry has emerged in response to a real and growing need in the community: How to provide options for older people to remain in their homes for as long as possible when they are asset rich and cash poor.
I looked at a property in Melbourne recently - a 'renovator's opportunity', a deceased estate. It was enough to make you cry!
The old woman had been living in this near derelict property, apparently in one room, the bathroom was nearly falling through the floor, the stink of cat strike throughout the house, the whole building in a terrible state. Yet now that she was dead, her children stood to inherit a considerable windfall, as land value alone was well over $200,000.
This is not to say that her children were selfish, they probably had nor more money than she had, but many older people will not spend a penny as they wish to be able to pay for their own funeral, and 'leave a little' to their children.
Reverse mortgages provide the opportunity - for those who want them - to be able to pay for necessary repairs and a basic quality of life in their final years.
Advertisements may play on the 'holiday, renovation, grandchild's education' emotions, but the stark reality is that even simple things like getting a heater fixed is beyond someone who has lived on just the pension for even a few years.
So reverse mortgages are a specialist product designed to fill a need and with complex lending rules and performance guarantees.
If you are on a fixed or limited income but have equity in your own home this puts you between two stools.
Taking out a line of credit will eat away at your equity even though, in theory, the property will increase in value over time, thus replenishing the equity drawn out in cash.
However, the compounding nature of interest may mean that a simple interest of, say, 8% becomes 8.64% in the second year, 9.33% in the third year and so on. It is easy for the loan to get out of control.
Obviously, if a credit facility is arranged for, say, $50,000 and you want to only draw $5,000 each year to top up other income, you have not arranged 10 years drawings, due to the nature of the interest compounding on the balance of the loan.
If you were wanting to do this for a specific period of time and for a particular purpose eg returning to work when the youngest child starts work, this may be a legitimate tactic. If you have a couple of million dollars of equity then living off the equity is less of a problem than if you have $100,000 worth of equity, but the debt is still growing and once the credit limit is reached then servicing the debt will be required - or arranging further credit, and so the debt continues to grow.
You may be interested to know that reverse mortgages are only for the principal place of residence, they are there to serve a need. If you are an investor, and want to consume the equity in an investment property and then sell it when the limit is reached (if it is not possible to service the debt) then that is a different tactic altogether.
You have raised an interesting question, but as with all complex situations there is no easy answer.
If you are genuinely seeking to access the equity in your own home you may wish to seek professional advice including that of an experienced broker before you make any decision. Not all lenders offer reverse mortgages, some lenders offer only reverse mortgage, but most lenders will be able to offer some sort of appropriate product depending on your particular circumstances.
Cheers
Kristine