Moving forward on reverse mortgages
The Australian Bureau of Statistics (ABS) estimates that between 1999 and 2031, the population aged 60 years and over will double. According to recent data, over 2.6 million Australians, or 13% of the population, are over the age of 65, as the ‘baby boom’ cohorts move into retirement.
These factors have given rise to a number of financial products targeting the ‘grey dollar’.
Interest in these products has also increased because of rising property prices, which result in high levels of home equity.
There is growing awareness of the retirement savings gap, particularly for the ‘baby boomer’ generation who are relatively cash-poor but asset-rich.
One class of products introduced to cater to these perceived needs are Equity Release Products (ERPs). There are three types of ERPs: reverse mortgages, home reversion schemes and shared appreciation mortgages.
The most popular of these are reverse mortgages, which are currently offered by a number of financial institutions including some of the bigger Australian banks.
A reverse mortgage is a facility that allows a homeowner to convert all or part of the equity in their home into cash or an income stream.
A key feature of this particular product is that the loan amount and interest is generally not repayable until the homeowner dies or moves out of the dwelling.
Before approving a loan applicant, a provider normally requires the borrower(s) to meet minimum age criteria. This usually falls somewhere between 60 and 70 years of age.
Minimum loan amounts will also usually apply. Depending on the lending institution and the age of the applicants, these may be $10,000 up to a maximum of the lesser of 45 per cent of the property’s value or $750,000. There is also often a requirement for the property to be subject to an independent valuation on a periodic basis.
It is important to remember that while repayments do not have to be made until the property is either vacated or the homeowner(s) die, interest is compounded and the debt increases over time.
There may also be other charges which apply, such as an application fee and monthly charges. These are included in the loan amount, which means they also accrue interest and compound at the same rate.
There are a number of risks presented by reverse mortgages. In a slower property market, such as the one we are currently experiencing where property growth is stalled or declining, the value of the loan can outstrip the property value.
For those who are drawing a government pension or other entitlement, the money received from a reverse mortgage can also affect the amount received.