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May 05 newsletter

Reverse mortgages (also known as reverse annuity mortgages and home conversion loans) are designed to help those retired households which are "asset rich and cash poor".

The classic, and increasingly common, scenario is that people retire with a single asset: their house. Their only source of after-tax income is the government super, of around $12,500 for a single person, or $19,500 for a couple. The result, therefore, can be a huge need for additional retirement income, and that's where the concept of the reverse mortgage comes in. It effectively allows you to sell part of your house and use the funds to either supplement your regular income, or spend a lump sum on home maintenance, medical care, or even a big overseas trip.

Essentially, a financial company will give you X amount of money. This can be in the form of a lump sum (home equity conversion option), or as a regular monthly income (reverse annuity mortgage). You then pay back the loan, with interest. And this is the beauty of the concept: you don't physically pay back any money. The debt is built up and is generally only repaid once the house is sold. Hopefully, that's when you've either moved upstairs, or into permanent care.

While it is an excellent concept, there are a large number of hooks you should be aware of before you begin talking to a representative of a company offering these products.

In the first instance, please always seek independent advice from both your financial adviser (who may make commission on the transaction) and your lawyer.

The following are examples of the more obvious issues you should be aware of:

• It is not the panacea for a lack of cash that you might have hoped for. In fact, you will be surprised at how little cash you can actually extract under these arrangements.
• Some options require the loan to be repaid when it reaches a certain level. Avoid this option, unless you want to be forced into selling up and flat hunting when you are 83 years old.
• In most instances, the loan is generally repaid when the house is sold. It is probably wise to only consider these options when you know your next home will be either permanent care, or with the angels.
• There can be a number of initial and on-going fees, such as valuation fees, which need to be understood.
• The concept is sold on rising property prices and low interest rates. When the reverse occurs, the value of your equity is rapidly reduced. This would limit your ability to obtain further funding and, of course, will reduce any intended inheritance.

Your financial adviser should be able to provide the right solution for your needs. It may not be one of the products in the market, but could be a recommendation to trade down for example.

Some providers of reverse mortgage products include,

• Bluestone,
• First Mortgage Trust,
• SAI Life, and
• Sentinel.

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