Having enough money to fund retirement is a big concern for Australians. The high cost of living can make paying the bills tough, and with the economic implications of an ageing population, the age pension may barely be enough to cover life’s necessities.
If you want more than just a basic lifestyle, you’ll likely need more money than the pension or your superannuation can provide, says Andrew Ford, CEO of specialist reverse mortgage lender, Heartland Seniors Finance.
“Many [Australians] who retire just desire a few of life’s ‘wants’; to travel, to enjoy outings with friends and family, or to occasionally spoil the grandkids,” he says.
A reverse mortgage can help you free up the capital you need to live the retirement you want without worry or stress.
Freeing up capital in retirement: the options
For many, downsizing is a great way to free up enough capital to fund an active and enjoyable lifestyle, but this option does have its drawbacks. “If you’re attached to your home, and enjoy the shops and services in your local area, downsizing might not be for you,” says Ford.
Unlocking the equity in your home could help fund your retirement
For a house valued at $800k, downsizing could cost $20k or more once you factor in moving costs, agent fees, taxes and conveyancing services from selling your home. The associated costs can quickly add up and exhaust quite a bit of the surplus made from your sold home.
However, if you live in a large residence that has become too big for your current needs, especially when it comes to maintenance and/or utility costs, downsizing can still be an appealing way to go as it could mean reducing those expenses. But it’s important to think about what living arrangement makes the most financial sense.
Alternatively, refinancing an existing home loan to a reverse mortgage loan or taking out a new reverse mortgage loan can be a more prudent option. This type of mortgage has been especially developed for people over 60 to help them free up capital without the stress of continually having to service the loan.
So, how does a reverse mortgage work?
A reverse mortgage allows those on a limited income to continue to live in and own their own homes without needing to make any repayments on that loan. Customers simply take a loan against their property, and the debt and interest is capitalised and repaid from the future sale of the property.
A common reason for taking out a reverse mortgage is to consolidate debts. “We get a lot of customers who come to us with credit card debts, or they have an existing home loan that needs refinancing. Heartland Seniors Finance can help those customers free up enough capital from their homes to give them peace of mind in their retirement,” says Ford.
How much money can I access?
The amount of money you can access is calculated using a percentage called a loan to value ratio (LVR), applied to the value of your property. The LVR is based on the age of the youngest loan applicant.
A 60-year-old applicant can borrow 15% of the value of their home, while a 70-year-old can borrow 25%.
For example, on a home valued at one million dollars, a 65-year-old with a LVR of 20% could borrow up to approximately $200k.
How can you access your funds?
There are multiple options for receiving funds, says reverse mortgage broker specialist Darren Moffatt of Seniors First. “Customers can take a lump sum payment such as a $100k loan or have the option of drawing down funds from a line of credit at their convenience,” says Moffatt. “Often customers will do both: they will take a lump sum of around $40k and have available a credit facility to use when they need it.”
“We’re not always talking about a lot of extra money but these extra funds can have a transformational effect on the lives of older Australians,” he adds.
Will it affect my age pension?
While Moffatt says reverse mortgage loans usually don’t affect the age pension, there are a few considerations worth noting. “It may be beneficial to have funds drip fed to the borrower so that a large amount of capital sitting in an account won’t be included in assets test under the pension,” says Moffatt.
“It’s also important to do your own research and enquire with Centrelink how a reverse mortgage may affect your payments,” he advises.
Do I qualify for a reverse mortgage?
There are a few requirements you will need to satisfy says Moffatt. “You need to be at least 60 years of age, you need to get your property valued and the property needs to be a good security (that is have nothing wrong with it). Ideally, you also need to have good credit,” he explains.
What fees can I expect?
There is an establishment fee of $495 and a fee for you to obtain your own legal advice as a requirement for the loan application. There could also be broker’s fees. “All in all, applicants should expect about $1-2k in start-up fees,” Moffatt says.
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