Recent changes to the pension benefits by the government have left some retirees with less in their pockets. As saving accounts suffer from low interest rates, pensioners may start to feel the pinch of the rising costs of living.
There is another alternative to improving your cash flow. Rather than downsizing or selling your assets, you can try a reverse mortgage. A reverse mortgage is one of the least understood financial products in the market but it can be beneficial to the right people.
It is a loan you take based on the value of your home, and you can receive it as a lump sum or as a monthly stipend. Although it sounds like refinancing or an equity loan, it is not.
A reverse mortgage does not have any monthly repayment. You don’t have to pay back the loan on a weekly, monthly or yearly basis. Typically, the loan is settled upon two circumstances:
- You die and the bank sells your house to recoup the loan
- You move out of the house due to old age, into an aged care, where your house will be sold to settle the loan
As such, a reverse mortgage is only available for people in their old age. The older you are, the bigger the loan you can receive. Older people can qualify for a bigger loan based on a higher percentage of your home’s value.
One of the biggest benefits of a reverse mortgage is that you can never owe more than what the house is worth. This is a regulation set by the government to protect pensioners, which means that you can’t take a loan of 100% of the equity of your home.
If you’ve been thinking of ways to do more during your retirement or need to fix a lethargic cash flow, then we’ve listed the case for and against taking out a reverse mortgage.
Why should you take a reverse mortgage?
1. It’s a good hedge against an unstable market
There are many dreadful things that could happen to your income sources. Rental rates could fall, the stock market could be experiencing a bearish period, the interest rate could go lower than average, and your businesses may suffer.
A reverse mortgage will help you out in times of instability, especially if you have other financial commitments. You can choose whether you want to take a small or big loan, and sit back to enjoy the cash without worrying about paying it back.
2. It’s good for those asset rich, cash poor
A reverse mortgage is suitable for those who have several assets but are lacking in cash. It’s one of the ways to unlock your assets and improve your cash flow quickly. Selling your home for the right price may take a long time – if you can find anyone who will meet your asking price. It’s a great alternative if you have investments in a variety of assets such as stocks, bonds, savings and properties.
3. It’s good if you want to live in the house you love
You can still live in your beloved home without downsizing or selling it to rent cheaply elsewhere. You won’t have to move suburbs and you can keep all the friends and places you have grown accustomed to. There are no drastic changes required to your lifestyle. This is especially good for people who don’t want to uproot their life in their old age. Once you weigh all the pros and cons, a reverse mortgage may make more sense than downsizing.
4. It’s good for much older people
Maybe you need to fulfil your bucket list in life. Or maybe you to enjoy your remaining days in full comfort. Whatever your reasons are, a reverse mortgage is an appropriate solution to consider. If you’re 70 or older, talk to a mortgage broker on whether it is worthwhile to apply for a reverse mortgage.
5. It’s good if you don’t have children to worry about
Most parents want to pass something on to their kids when they die. But a reverse mortgage will deplete your home value. Once all the loan is paid off, your estate may be left with little or no profit to keep.
So, a reverse mortgage make sense when you don’t have any kids or younger family members to worry about. Put simply, if you have no one to pass on the family fortune, then a reverse mortgage is the way to go.
Why shouldn’t you take a reverse mortgage?
1. It’s bad if you don’t have other assets or income
Nobody can predict what will happen towards the end of your life. You may plan to live and die in the house you love. But what if your health deteriorates and you need to be in an aged care? You will need to supplement this unfortunate event if it happens. Don’t take out a big loan on your home if you don’t have any asset or income source you can fall back on during troubled times.
2. It’s bad if the interest rate is high
The interest rate of a reverse mortgage may be higher than other types of home loans. The higher the interest rate, the bigger your debt will grow over the years. When it snowballs, you or your estate may have nothing left after the banks sells your house. You will be sacrificing the capital gain from your home for a loan with high interest rate.
3. It’s bad if you have dependants or commitments
If you have dependants or other financial commitments, a reverse mortgage will eat into your house’s value. For most Australians, their humble abode is usually their biggest asset. You will land into hot water if you fail to plan and account for those depending on you and other financial responsibilities. However, it’s worth considering a reverse mortgage if you own enough assets and passive income to supplement any shortfall.
In conclusion, don’t make a bad move in your old age because the consequences could be disastrous to your mental and physical health. You should seek professional advice before making any big financial decision. A mortgage broker should be able to help you research the market and dish out the best course of action to take so you can enjoy your retirement to the fullest.