Retirement reverse mortgage debt

Retirement reverse mortgage debt

by Christine Hopper

In retirement reverse mortgage debt can appear as the ‘solution’ to a pattern of spending more than your regular retirement income.

On retirement from full time work we each need to develop a new pattern of spending time and money. Suddenly we might find that we have more time available for the activities we enjoy. But we also discover that our salary has stopped. We might hope to draw income from our assets to supplement any Centrelink Pensions.

The retirees with large superannuation account balances have the challenge of investing their superannuation and other assets to generate a good income.

Other retirees are relying on using their superannuation to payout their home mortgages and then ‘go on the Pension’. These retirees have the challenge of adjusting to a much lower level of income. Mortgaging the home again could be attractive when big bills arrive for home maintenance or the ‘essential’ dental or elective medical treatment or just that long planned overseas holiday.

New Retirement debt via a Reverse Mortgage

Banks offer ‘reverse mortgages’ to retirees who want to access the capital stored up in the value of their homes. The banks realise that the retiree does not have the income to make regular repayments of capital or monthly interest. Therefore reverse mortgages for retirees allow for the interest to accumulate until the home is sold. When the home is sold the bank is repaid both the capital amount borrowed and all of the interest accumulated during the reverse mortgage loan period.

No bank wants its customers to have negative equity in their homes. The bank always wants the customer to get a payout when the home is eventually sold and the mortgage repaid. Therefore the banks usually lend only a small fraction of the value of the home when the reverse mortgage is granted.  The bank then minimises the risk of the amount owing under the reverse mortgage exceeding the proceeds of selling the home, .

The maximum percentage of the home value that could be lent as a reverse mortgage increases with the age of the borrower.
The maximum reverse mortgage loan might be 40% of the bank’s valuation of the home of a very elderly single retiree homeowner.
A younger retiree might be permitted to borrow a maximum of 15% of the bank’s valuation of her home so that thirty years later when she goes into aged care, the accumulated loan amount is unlikely to exceed the updated value of her home.

Some banks only grant reverse mortgages to retirees who have attained age 65 years. A few banks grant reverse mortgages to people who are only aged sixty years.

Most lenders require the owners to be living in the home when the reverse mortgage is granted.

The reverse mortgage is not required to be paid out until owners move out of the home. Thus moving to a retirement village, lifestyle community living or aged care would trigger a requirement for the home to be sold and the reverse mortgage paid out. Most reverse mortgages must be repaid when the owners enter residential aged care.

Where a reverse mortgage is secured against the home of a couple, both members of the couple sign as the borrowers.  The reverse mortgage does not have to be repaid if one member of the couple continues to live in the home after the other has entered permanent residential aged care. When the second member of the couple leaves the home then the reverse mortgage becomes due for payment.

Understanding Retirement Reverse Mortgage Debt

Retirees usually obtain a reverse mortgage because they have insufficient income to cover their expenditure. The ‘income expenditure gap’ could have resulted from an essential repair to their home or a reduced Centrelink Age Pension because of continued ownership of a holiday house.

Alas some retirees use a reverse mortgage to consolidate their accumulated debts and support an ongoing lifestyle beyond the modest level of a full Age Pensioner.

Many reverse mortgage contracts require the reverse mortgage to be paid out immediately the owners vacate their home. Thus when the owners move out the home is sold and the mortgage repaid. The lender wants the final sale price to be more than the amount owing on the reverse mortgage.
If no interest payments were made during the term of the mortgage then the final amount would include the accumulated interest in addition to the capital amount borrowed.

Applicants for reverse mortgages may be required to have an independent financial adviser or accountant, explain the terms of the reverse mortgage. The independent adviser could read through the offer of a reverse mortgage contract with you and clarify the concepts of compounding interest and variable interest rates.
The objective of these consultations is to reduce the risk of disputes later when the borrowers realise that they have been accumulating the interest and increasing the dollar amount of their debt.

Financial Care Services consultations for reverse mortgage debt applicants.

At Financial Care Services, our objective is to assist clients to arrange their financial affairs responsibly and claim any relevant Centrelink or DVA benefits. Financial Care Services is independently owned and operated, our clients are charged fees for advice.

Applicants for reverse mortgages are welcome at Financial Care Services.
In preparation for a consultation regarding a reverse mortgage application, new clients must submit the full personal financial data that Financial Care Services requires of every retiree client. Your adviser at Financial Care Services needs to understand your financial position in order to highlight to you the implications of your proposed reverse mortgage.
Seniors are encouraged to have a family member and/or their Power of Attorney attend the reverse mortgage consultation. If the family are aware of the reverse mortgage debt from the outset then later misunderstandings are less likely.

If you are considering a reverse mortgage debt to finance your retirement living or consolidate your existing debts you can contact Financial Care Services for the Retiree Client Personal Data forms to prepare for a Reverse Mortgage Consultation.

Once you have your offer of a reverse mortgage call Christine on 03 9808 0338 to arrange a Reverse Mortgage Consultation.

Our standard hourly rate fees apply for Reverse Mortgage Consultations at Financial Care Services.  The fee for your Reverse Mortgage Consultation must be paid to Financial Care Services on the same day as your consultation; you cannot defer payment of your Reverse Mortgage Consultation fee until your loan is granted.

Retirement planning with Financial Care Services

Christine at Financial Care Services also engages with clients approaching retirement to plan their retirement finances.
Planning your major expenditure and budgeting your ongoing retirement lifestyle outgoings helps you live within your means and avoid debt in retirement.
Call Christine on 03 9808 0338 to book an appointment to discuss your long term planning for when you no longer earn an income from work.

Financial Care Services is an independent financial advisory service specialising in retirees of modest means and aged care entrants. Christine at Financial Care Services understands both the DVA and Centrelink Pensions systems and the Commonwealth aged care fee arrangements.

A consultation with Financial Care Services helps you understand your potential retirement living and aged care costs together with the DVA and Centrelink implications of rearranging your assets or selling the former home. Call Christine on 03 9808 0338 to make an appointment for a consultation.

Financial Care Services is licensed to offer investment strategy advice and to assist you to invest. Financial Care Services charges fees based on the work involved in advising you and arranging your investments. Financial Care Services does not base fees on the value of your assets nor do we accept any commissions or payments from other service providers.

If you would like further confidential, independent and professional advice about DVA, Centrelink, lifestyle aged care costs or financial issues please contact Christine Hopper 03 9808 0338.

Disclaimer: The information contained in this website is of a general nature only and does not constitute “financial advice”. You should obtain your own personal financial advice before investing any money or moving in to any retirement village, lifestyle community or aged care facility. Financial Care Services is licensed to provide financial advice to individual clients based on their personal situations. © 2014 Financial Care Services Pty Ltd. All rights reserved.