Asset rich and cash poor – it’s a term many older citizens use to describe their financial situation and reflects a lifetime of accumulating money for their impending retirement or a rainy day.
For many, the concept of asset rich can include an investment portfolio and a self-managed super fund – but for most older Australians, many of whom spent much of their working life without the benefit of employer contributions to super funds, the majority of their wealth is locked up in the family home.
This is understandable. Less than 70% of Australians own their own home, a number that has gradually dwindled over the last few decades, and for those who do it can take a lifetime of work just to fully repay the mortgage and own it outright. The opportunity to invest money elsewhere at the same time has been something that few can dream of.
The problem with having your wealth predominantly tied up in a roof over your head is that it doesn’t provide you with an opportunity to use this asset for lifestyle choices or to build further wealth. It can be hard to have your cake and eat it too – or so it seemed.
Reverse mortgages give you the opportunity to do just that. A reverse mortgage provides you with the opportunity to borrow against your asset now with the interest and repayment to come later when the home is sold up. This provides you with the chance to unlock the equity you have accumulated and enjoy it while you can rather than going without and leaving an asset for others to enjoy.
Reverse mortgage funding may take the form of a lump sum or regular cashflow with the interest on the funds being added to the principal owing. Funds are repaid on the sale of the property at a later stage. As the interest doesn’t have to be serviced during the loan period it means that your income becomes less of a factor when assessing you for loan approval.
Although a reverse mortgage can provide you with an opportunity to live now and pay later, there are other factors that need to be considered before going ahead and good advice is important. If you have intentions for the home to be left to anyone, or have someone else who lives with you, then this will need to be considered. It’s important to understand that interest rates on this type of loan may also be higher and compounding interest can see the debt mounting quite quickly.
Government legislation does provide protection meaning the lender cannot seek more from you than the sum of the house proceeds when it sells. As such they will want to protect their risk and there will be a limit as to what percentage of the value of the home they will be prepared to lend. You will also need to consider that you may not stay in your home until your death and that some funding may be required for use after you move out, e.g. into a rest home. Accordingly, you can protect a portion of your equity with this purpose in mind to ensure there are some proceeds from the house sale left for your own use.
Although a relatively recent financial vehicle reverse mortgages offer older citizens the chance to unlock equity in their home and their popularity will continue to grow. As always, it’s important to seek the advice of financial experts before committing to this type of loan.
If necessary, you should consider getting professional advice. This will help you understand your options. Mynextadvice helps individuals connect to the best Advisors in just a few clicks.
The information in this article is general in nature and does not take into consideration your personal situation or circumstances. You should consider whether the information contained in this article is suitable to your needs and where appropriate, seek professional advice from a Financial Advisor or other finance professional.