Be aware of pitfalls of reverse lending
THE latest round of figures showing rising home values means many Australian retirees could have a valuable resource at their fingertips.
Older Australians, who may not have enjoyed the benefits of employer-paid super for their entire working life, can face the prospect of a lean retirement. However, one area where over-50s often have an advantage over their younger counterparts is home ownership
For senior Australians, home equity can be a source of retirement income.
It's all thanks to the availability of reverse mortgages - a financial product that allows homeowners, usually aged 60-plus, to draw on home equity with loan funds secured by their home.
No repayments are necessary with a reverse mortgage, at least while you live in the place. Interest charges and fees are added to
the loan balance with
the total to be repaid when the property is sold or the last borrower has passed away.
It's an option for asset-rich, cash-poor seniors to boost retirement cash.
But reverse mortgages do have downsides.
In its January 2017 star-rating report on reverse mortgages, research group Canstar found the average interest rate applicable to these loans is 6.25%.
That's around 2% more than you could pay on a standard home loan, and the mounting interest charge raises questions about how a reverse mortgage can impact home equity over time.
Let me start by saying that Anyone considering a reverse mortgage should look for a 'no negative equity' guarantee.
This means you will never owe more on the loan than the value of your home.
That said, Canstar found that after 20 years, a loan for $90,000 representing 15% of a property's value, could end up costing a total of $349,431 including the initial borrowing.
Over 30 years, the loan cost including principal, could blow out to $662,131.
For some retirees finding it tough to meet the cost of living, a reverse mortgage may be worth considering.
But it is an area where good legal and financial advice is essential.
- Paul Clitheroe is a founding director of financial planning firm ipac, chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.