For a large percentage of retirees who don’t have substantial savings in superannuation or private funds, the pension alone will just not be enough to live on comfortable. In fact, a recent report by the OECD (Organisation for Economic Co-operation and Development) in 20151 said that one third of Australian pensioners are living below the poverty line.
To make matters even worse in the future, an Intergenerational Report released by the Commonwealth of Australia in 20152 revealed that government pension payments would rise to a staggering $160 billion by 2055. This is likely to put a huge strain on our economy as the number of working tax payers decreases in proportion to the amount of pensioners which need to rely on government payments.
A Lot Of Retirees Have Their Cash Tied Up In The Family Home
A large percentage of retirees own their own home which means they are asset rich but cash poor. In the past, the main option facing these retirees was to sell the family home and either downsize into a smaller apartment or buy into a retirement village.
This can often have a detrimental affect on the health and wellbeing of these retirees because they are forced to move from a familiar neighbourhood, where they brought up their children, into a much more unfamiliar area where they may find it hard to make new friends.
Selling the family home may also affect the retirees’ pension entitlement as the balance of the cash they receive after selling their home and purchasing a less expensive apartment or retirement unit will be counted in the asset test which means lower pension entitlements.
A Reverse Mortgage Is A Great Alternative To Downsizing
If the thought of selling your home as you move into retirement fills you with dread, there is an alternative. You can free up some of the equity you have in your home by taking out a reverse mortgage. The many benefits of a reverse mortgage include:
- No need to make regular repayments as the loan is paid out when the house is eventually sold, when you move into an aged care facility or when you die.
- You retain full ownership of your house until you decide to sell it.
- You can take the loan as a lump sum, as a draw down facility like a line of credit or even as a regular income stream. Or you can choose to have a combination of all three.
- Most reverse mortgages also come with a No Negative Equity Guarantee which means that you will never owe more than what the property is worth when it is sold.
- You can use the borrowed funds to make some home improvements so that it’s easier and more comfortable for you to stay in your home for as long as you possibly can.
- You can also use a portion of the loan to upgrade your car or take a much needed holiday.
- You can use the funds to pay for emergency medical expenses or to pay the deposit for aged care if you or your partner need to move into an aged care facility due to illness.
Of course, as is the case with any type of loan, you also need to be aware of the possible down sides. Some of these include:
- The interest on the loan is compounded and added to the total outstanding amount as well as any monthly administration fees. This means that the outstanding amount could grow quite quickly so you need to make sure that you speak to a mortgage broker who can use a suitable loan calculator to estimate how much you could owe over the years ahead.
- You need to ensure that you’ll still have enough equity left in your home to pay for a spot in an aged care facility if you need one. With some reverse mortgages you can actually have the option to preserve a certain amount of the property value for just this reason.
- If you have children and/or grandchildren, their inheritance may be substantially reduced.
Although these may be considered as negatives, if you make sure that you’re fully informed about all the terms and conditions of a reverse mortgage and are fully aware of the figures, you will most probably find that the positive aspects of a reverse mortgage far outweigh any possible disadvantages.
How Can A Reverse Mortgage Benefit The Economy?
There are a number of ways that a reverse mortgage can help both you and the economy. These include:
- As a retiree you’ll have access to much needed cash to help with your everyday needs. This means that you’ll be less reliant on the welfare system and you’ll be able to live a more comfortable lifestyle. You can go out for meals, buy a new car and do some home improvements. All this spending helps to keep people in jobs and puts money back into the economy.
- It mobilises and converts into spendable cash some of the idle equity which is sitting in your home, thereby increasing the amount of money you can put back into the economy by doing the things that make life more enjoyable.
- A reverse mortgage can also offer you the ability to retire earlier than you originally may have by giving you an income stream before you are eligible for the pension. This is because you can access a reverse mortgage from age 60 onwards. This means that your job is then available for someone younger and this can also help to reduce the pressure on the welfare system.
- It also allows you to stay in your home much longer than you may have been able to meaning that it takes the pressure off aged care facilities as well.
In concluding, a reverse mortgage is a great way for you to access some of the equity in your family home to enjoy a better lifestyle in retirement and help the economy by being able to spend on things that you want to do.
As with any type of borrowing, speak to a professional, like a mortgage broker, so that you have all the facts and know exactly what this type of loan will mean to you and your family.