By Mohammed Azeem, Mortgage Choice in Hornigsea Park
When retirement rolls around it's time to put your feet up and unwind while your home goes to work generating extra cash. Mortgage Choice broker Mohammed Azeem explains how.
For many of today's seniors, who haven't had the benefit of compulsory superannuation for their entire working life, retirement can be a pretty lean time.
Plenty of retirees are ‘asset rich but cash poor', living in much-loved family homes that they have no wish to sell, but without the funds needed to enjoy a decent retirement lifestyle.
Fortunately there is a potential solution.
Harness home equity
Older home owners can harness the equity in their home through a product called a ‘reverse mortgage'. This is essentially a loan secured by your property, however rather than repaying the lender each month, the lender pays the funds to you – the homeowner, either via a series of regular payments to supplement income, or as a lump sum, which can be used to pay for renovations, a new car or just a well-deserved holiday. Best of all, no repayments are necessary until the homeowner sells the property, or the loan plus accrued interest can be repaid from their estate.
For many seniors, the family home is their most valuable (sometimes only) asset, so any product that impacts home equity should be approached with caution. It is worth noting that only mortgage brokers and lenders with specialist accreditation can help you select a reverse mortgage product.
One of the key issues to note is that reverse mortgages are generally only available to home owners aged over 60 though some banks prefer borrowers to be aged 65-plus. You need to own your property however it isn't usually a problem if there is still a small balance remaining on the original home loan.
Access up to 25% of home equity
The amount you can borrow will depend on your age and lender. As a guide, the upper limit tends to be about 25% of your home's current value. Reverse mortgages are available for most types of properties such as units and houses, though lenders generally shy away from properties with ‘old title', which is rare these days, or company title.
The rates on reverse mortgages are higher than that of traditional mortgages – ranging from around 7% to 8.5%, and while no repayments are required during the course of the loan, interest is charged from day one. The extent to which the loan and interest affects your home equity will depend on the growth in your home's value over time. I like to walk my clients through the reverse mortgage calculator on the government's Money Smart website, which shows the outcome across a number of property market scenarios.
Discuss your plans with family members
As a reverse mortgage can impact the value of your final estate, it's a good idea to discuss your decision to use this product with family members. In my experience, adult children don't tend to begrudge their parents the opportunity to enjoy a better quality retirement by tapping into home equity.
I've come across clients who have used a reverse mortgage to pay off otherwise crippling credit card debt, or to renovate homes that haven't been touched for 40 years. There is simply no way the age pension allows this sort of financial freedom. When used sensibly, a reverse mortgage can offer a vital lifeline of funds that can help to enrich the final years of your retirement.