Take care with re­verse mort­gages

Central Leader - - OPINION -

Re­verse mort­gages, other­wise known as eq­uity re­lease loans, have been tipped as a prod­uct of the fu­ture for a long time.

With an age­ing pop­u­la­tion of cash-strapped house-own­ers, the ar­gu­ment goes that lenders will­ing to hold off re­ceiv­ing in­ter­est for a few years have a ready mar­ket to tap.

The boom hasn’t hap­pened yet but Heart­land Bank is do­ing its best to give it a push along with a TV ad­ver­tis­ing cam­paign.

Read­ers, prompted by my last two col­umns on re­tire­ment vil­lages, have asked me to out­line how these loans work.

In short, they are loans se­cured against the eq­uity in a home, avail­able to people over the age of 65.

They place a lump sum in the hands of the bor­rower they can use for any­thing.

It’s like free­ing a chunk of eq­uity from the home, hence the name ‘‘eq­uity re­lease’’.

No re­pay­ments have to be made un­til the home is sold and when that hap­pens it is left to the owner.

That al­lows people to do things they could other­wise not af­ford, such as re­pair­ing a leak­ing roof, re­plac­ing a car or bring­ing for­ward an oper­a­tion, things that can mean the dif­fer­ence be­tween an older per­son hav­ing to go with­out, suf­fer­ing in si­lence and los­ing their dig­nity and qual­ity of life.

Key pro­tec­tions in­clude Heart­land promis­ing home­own­ers will never end up ow­ing more than the value of their home.

The fees are high, in­clud­ing a $1195 ar­range­ment fee, and in­ter­est is higher than an or­di­nary mort­gage.

And as there are no re­pay­ments un­til the house is sold, the amount owed com­pounds, so over time these loans pro­gres­sively trans­fer eq­uity from a house­holder to the lender, hence the name ‘‘re­verse mort­gage’’.

At the time of writ­ing, Heart­land was charg­ing 7.85 per cent, and it is a vari­able rate, so it can rise or fall, though Heart­land says it aims to keep it at 1.5 to 2 per cent over the ma­jor banks’ vari­able mort­gage lend­ing rates. In times when house prices shoot up, re­verse mort­gages are eas­ier to buy but as Gareth Mor­gan in his book Pen­sion Panic warned: ‘‘These prod­ucts have the po­ten­tial to cru­elly de­stroy the as­set base of the aged un­wary.

‘‘We oc­ca­sion­ally en­joy a run where in­ter­est rates are low and property val­ues are ris­ing; un­der these cir­cum­stances, re­verse mort­gages look pretty good.

‘‘But we also have phases where in­ter­est rates are high and property val­ues are flat or de­flat­ing.’’

Heart­land has an hon­est cal­cu­la­tor on its web­site so po­ten­tial bor­row­ers can play about with in­ter­est rates and ex­pected house price growth to see what would hap­pen to their eq­uity in var­i­ous sce­nar­ios.

The stan­dard in­ter­est as­sumed by the cal­cu­la­tor is 8.85 per cent, higher than its cur­rent rate, and we’ll as­sume that’s roughly the long term aver­age Heart­land thinks likely.

At 3 per cent house price growth, a loan of $50,000 and a house worth $500,000, the amount a bor­rower would owe af­ter 10 years would be just over $120,000 and eq­uity left would be around $549,000.

Drop the growth rate to 1.5 per cent and eq­uity re­main­ing would be $458,000.

Drop it to zero and the eq­uity would be around $378,000.

And of course $1 in 10 years’ time is worth less than $1 now. Such large changes from such small vari­a­tions in the in­puts to the cal­cu­la­tor show these are very se­ri­ous loans.

Take time to un­der­stand them. Ex­plore other op­tions first.

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