Disclaimer: This post is written as a consumer, and does not purport to be an authoritative guide to the topic of reverse mortgages for retirees. It seeks to stimulate the interest of fellow retirees and assumes that they will do their own research and obtain independent advice as needed.
Seniors First and regulatory changes
There is nothing new about reverse mortgages. They have been available in the past, but the terms have been heavily weighted in favour of the providing financial institutions. Pensioners have lost their homes for paltry cash advances.
It would seem that much of the credit for a change in attitude towards them is due to Darren Moffatt who in 2006 established a mortgage broker company known as Seniors First targeting the financial needs of the over 55 age bracket.
He set a voluntary code of conduct that safeguarded the legitimate interests of pensioner borrowers from third party financial institutions. By 2010 he had 5% of the broking market in this field.
In 2011 the government set regulations that protect consumers. One of the introduced measures is a no negative equity guarantee, so the lender can not charge you more than the home is worth.
There are bank imposed limitations to how much you can borrow against the value of your home, but should you require more, it is possible to sell a percentage equity of your home, but retain the right to occupy, as a co-owner, until you die . These products are known as home reversion mortgages.
Home equity has out-performed superannuation investment performance for many Australians.
Deloitte recently reported that the value of the reverse mortgage market is now estimated at $3.7 billion. This statistic is evidence of the growing acceptance of accessing equity in the home
Either superannuation is not proving adequate to meet the needs of retirees or they have enjoyed large windfall capital gains in their homes. This is true especially in Sydney and Melbourne. Alternatively both possibilities could be true.
A home is arguably a safer and better performing investment than long-term superannuation savings. This is not to say that it is not important to invest in both.
Money invested in your own home is a financially sound strategy.
- Inflation increases the value of the asset and the gain is not taxable.
- The value of the asset compounds yearly, whereas the value of the mortgage owed diminishes.
- There is an immediate and continuing benefit in not having to pay rent with the rental increasing year by year.
- Superannuation savings are locked away until the retirement age, which is increasing to 70 years.
- At retirement the value of the home and home-improvements are excluded from the asset test. Any change to this would still preserve a threshold value for exemption.
- Home equity is usually quarantined from the catastrophic falls in equity markets.
- It is possible to borrow against home equity and still retain ownership and occupancy.
The “New Look” Reverse Mortgages are a valuable tool to keep the elderly in their own home when they are asset rich but income poor and unable to meet the rising costs of owning a home.
The government is promoting and regulating reverse mortgages, knowing that it is unlikely that pension payments will keep up with inflationary demand. This is a way to allow retirees meet their income needs.
The government view is also that as far as possible the aged should pay for the spiraling costs of their care, including the provision of nursing home facilities. Those admitted must pay an interest free bond of up to about $500,000 by selling their home, or taking out a reverse mortgage instead. This is returned to their estate after they die. They must however be left with $45,000 cash in hand.
Reverse mortgages are complex instruments to understand, needing legal and financial advice to set them up wisely.
They should only be used when the owners are strong and well enough to be able to look after themselves, and their home.
Those embarking on them should be warned that they will be sacrificing benefits of home ownership, and that their children’s inheritance will be diminished.