You've done it! You've finally retired and now you have all the time in the world to do all the things that you've ever wanted.
You've been dreaming about travelling the world ever since you can remember but have always been too busy with work and family commitments. Now that you're retired you finally have the time to take those trips.
There's only one problem. All your wealth is tied up in your family home and your retirement income is just not enough to allow you to take those trips you've been planning for so long.
There is a solution that you may just want to consider. A reverse mortgage!
So What Is A Reverse Mortgage?
A reverse mortgage allows you to borrow against the equity of your home to top up your retirement income. The loan can be in the form of a regular income, a lump sum, a line of credit or in some cases, a combination of these.
You still retain the title of your property and can continue to live in it for as long as you want. Plus your home's market value will still continue to increase.
The good thing is that you don't need to make any repayments as the loan is paid out when your home is sold. This can happen if you decide to move into a retirement home, an aged care facility or when your house is sold as part of your estate.
To ensure that you or your family don't end up with a debt after your home is sold, the Government introduced statutory legislation in 2012. This is called 'negative equity protection' and ensures that the lender cannot be owed more than the market value of your home.
The interest rate for a reverse mortgage is usually a little higher than for a normal mortgage (currently around 6.5%) and is compounded for the life of the loan. There are also fees associated with setting up a reverse mortgage.
So How Much Can You Borrow?
How much you can borrow depends on your age and the value of your home. According to the Australian Securities and Investments Commission (ASIC) at around age 60, the maximum amount you can borrow is around 15-20% of the value of your home.
This percentage increases as you get older and could be around 25-30% when you reach the age of 70. Remember though, that the interest compounds and so your debt could grow relatively quickly.
For example, if you borrow $50,000 at age 60 at an interest rate of 10% which is calculated monthly, your debt could increase to $232,000 by the time you reach 75 and $1,041,000 by the time you reach 90.1 The graph below illustrates this.
Source: Australian Securities and Investments Commission.
Before deciding on the amount you might want to borrow to fund your retirement travel you should probably sit down with a financial advisor or your accountant and work out how much of the equity of your home you want to preserve.
Take into consideration the cost of aged care and increasing medical costs as well as how much you want to leave for your children and grand children.
Remember also to find out whether the reverse mortgage will affect your pension entitlements if you have any.
So What Should You Look For In A Reverse Mortgage?
Before deciding on a reverse mortgage lender, you should definitely consider the following:
- How much will it cost?
Consider the interest rate of each lender and also the upfront and discharge fees.
Also check whether there are any ongoing fees such as monthly charges.
- What are the terms of the loan?
Find out what the minimum loan amount is and how much of your equity you can borrow. Check if you can use the equity in a holiday home or investment property that you might own.
Also check whether there is a protected equity option and how much of your equity you can protect from the lender.
It's also important to check whether there are any restrictions on what you can do with the borrowed money.
Make sure you also ask if there is a cooling off period just in case you change your mind.
- What happens if your circumstances change?
You should find out what would happen if you or your spouse dies or whether you need the permission of the lender to renovate your home or have another person move in with you.
Also check whether you need permission to sell or lease your home. For example you might want to holiday-let your home while you're away on a 6 week cruise!
- Are there special functions with the loan?
Check whether you can attach a mortgage offset account to the loan or whether there is a redraw facility.
Also check whether you can make payments on the loan if you wish.
- Are there any default clauses?
Find out if there are any default conditions and what action can be taken by the lender if you are in default.
- What is the loan application and approval procedure?
Find out whether the loan application and approval processes are easy and straight forward and what kind of documents you'll need.
Always ensure that you get independent legal advice before entering into any type of loan contract and you might also want to consider engaging a mortgage broker who is skilled in reverse mortgages to help you with this research.
Taking out a reverse mortgage on your family home may just be the ideal way to fund your retirement travel plans. Why not make use of the wealth you've acquired over the years by diligently paying off your home and increasing your equity.
Remember to make sure though, that you do your research and work out how much it will cost you in terms of the market value of your home.