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The recent economic downturn has affected people worldwide including many Australians on the verge for retirement. Like many, retirement programs got hit, stick market investments dwindled usually leaving as the one true equity vehicle a home lived in for some time. At best, however, the home market has taken quite a hit with property values declining. But, with other investments tanked, using home equity for retirement purposes in the form of a reverse mortgage may be a viable option.
What is a Reverse Mortgage?
This is a special loan product that allows owners to turn home equity into cash while continuing to live in the dwelling. The equity that has been built up through years of payments can be accessed as either a lump sum or in payments. As long as the “borrower” uses the home as the primary residence no repayment is ever made. Payments would come due after death of the owner (s) or, in the event of poor health, a necessary move to a nursing facility. This type of finance product became popular even before the recent hard economic times hit.
Does It Really Work?
According to the Senior Australians Equity Release Association of Lenders (SEQUAL), there were 37.500 reverse mortgages totaling $2.5 billion at the end of 2008. According to the report, couples were the predominant borrowers constituting 44 percent of reverse mortgages. However, single retired women borrowed an average larger amount ($74,300) compared to couples borrowing an average $67,600. Although the average borrower age came in at 74, a trend showed more under 70 age borrowers accounted for 37 percent of the 2008 issued loans. They also account for 30 percent of the existing loans. The popularity of the finance product was fairly well split across the country with Queensland dominant at 23 percent of issued loans. NSW accounted for 22 percent while VIC, SA and WA each ranked at 16 percent. With this type of usage popularity, the reverse mortgage appears to be effective as a finance product for seniors.
Benefits from a Reverse Mortgage are Many
First off, unlike a traditional home loan, seniors need no income to qualify for a reverse mortgage. Plus, a traditional loan means monthly repayments when, in fact, taking out a reverse mortgage pays you, the homeowner. The amount you can qualify to borrow is dependent upon your age, the appraised property value and the prevailing interest rate. Interestingly enough, the older a borrower is along with a prevailing low interest rate and a valuable home can produce a larger amount to borrow. This can be important when planning retirement seeking to come up with a budget that not only allows the payment of monthly expenses but helps provide a relaxed and enjoyable retirement. Additionally, when a borrower dies, the loan is repaid through sale of the house leaving any remaining equity in the home to your heirs.
There is a need to closely examine this type of financial product because based on risk alone lenders have a tendency to try to make this a better deal for themselves heaping a good many fees upon the borrower.
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