Reverse Mortgages - Converting Equity into Income in Retirement
Retired clients who have used up most of their assets besides their home
and who are therefore asset rich but income poor should be aware of a loan
product that is tipped to increase in popularity, namely the reverse
mortgage or equity release loan.
Reverse mortgage products allow a person to unlock some of the equity in
their home. These products allow individuals to remain in their family home
and still generate an additional retirement income stream based on the
equity released from their home.
These new products are especially useful for those who have run down their
other retirement savings such as superannuation, allocated pensions, managed funds, share portfolios and fixed
interest investments. The increasing longevity of retirees is also making
these products more relevant since investors are more likely to consume
their other assets.
How they Work
Basically a reverse mortgage involves the person borrowing money against
the equity in their home, with the principal and interest not being repaid until the home is sold or they pass away. The interest is capitalised. The equity released can be converted to either a lump sum or regular
payments.
Because of bad experiences in the UK and USA, all Australian reverse
mortgage products are required to offer a "no negative equity" guarantee.
This means that the debt will never exceed the value of the property. The
maximum loan to valuation ratio (LVR) tops out at 50% with most products
only offering 40%.
During the last year or so the number of reverse mortgage products has
increased to about 20. While the sector is currently worth only about $1.5
billion, it is projected to grow by 50% per year to
$12-$15 billion by 2010. This may be conservative as home equity in the
over-60s exceeds $300 billion.
Note that home equity products can be a complex area, particularly when
loans are based on estimated house value and longevity rates. There are also
potential social security impacts depending on the structure.
If you would like to attend a free Reverse Mortgage Seminar to be held in Sydney click here to register. If you would like to speak to a financial planner to learn just how you could benefit from a reverse mortgage simply follow this link: Enquiries Desk and mention "Reverse Mortgage".
Source: Personal Wealth
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