I am worried. Worried about parents; mine seem to be having a very tough time of it financially lately.
If your folks are like mine they worked hard all their lives to pay off the house, and provide for the family, and now in retirement they barely make ends meet. Unlike us, they generally have little or no superannuation and are unlikely to have a property portfolio to fall back on.
I think retirement is the time they should be enjoying themselves, but the harsh reality is most retirees live just above the poverty line. They can’t afford to holiday. They have to continually shrink their lifestyle to meet the available money. And it’s often a disaster when the car needs fixing or the water heater needs replacing. They just don’t have any money in reserve.
A reverse mortgage may be the answer
These loans have names like seniors loans, money for living, lifetime loan etc are a new type of loan. One where no repayments need be made. Ever. The loan is paid back when the property is sold. The loans are done in such a way that the interest just accumulates.
Here’s how it works:
- The loan can be for a lump sum or for a regular amount e.g. $5000 each year. The maximum loan is determined by age. Bank documents must be signed, and they hand over the title to the bank.
- Funds can be used for any purpose. Renovate the house, help with living expenses, buy a boat, take a yearly holiday or to pay out existing loans: any purpose whatsoever.
- No repayments. Ever. However if they would like to pay some back, they can.
- They don’t need an income to apply. Anyone 60 and over, with a property can apply.
- They retain full ownership of the property until it is sold and retain all the benefits of any growth in the value of the property.
- Because it is a loan and not income, the money doesn’t affect the pension. (Of course if the money is used to buy income producing assets then that may affect the pension – but always seek advice from Centrelink or an accountant.)
- The property will be increasing in value at a far greater rate than the interest can accumulate. And if this is a worry, there are some lenders who will make guarantees about this. Speak to your “Sequal” accredited mortgage broker.
So what’s the catch?
- The bank gets the title to the house. My parents hated this idea, and never wanted a mortgage again but they are coming around now they see the benefits.
- Interest rates are higher than standard loans. Some banks let you fix the rate; at others the rate is variable. Variations in policy too mean some banks lend more than others.
- There is interest on the interest. Unavoidable I’m afraid.
- What can be borrowed is based on age of the youngest person in the house. Somewhere between 25% and 40% of the value will be allowed.
- Since the GFC only a few banks now do these loans. And you must go through a Sequal accredited mortgage broker.
If your parents are like mine they won’t want to get into debt again. But the other options, like selling are not appealing to them either. Reverse mortgages are a different kind of debt, one which I hope will turn their lives from one of struggle, to enjoyment. At least it’s an option and can help them stay at home longer. I hope this has opened you eyes to a new type of loan.
Property is Catherine Lezer’s passion. She owns nine properties of her own and has a fundamental understanding of how the property market works.
“I’ve bought some great properties and some ‘bad’ properties, and even the bad ones have made me money,” says Catherine. “Property is the most reliable way to make money that I know!”
“I’ve purchased, sold, tendered, offered, negotiated, won and lost at auction, developed and renovated so I understand what happens out there in the market,” she adds. “Being able to help other people finance property is an added bonus for me.”
Originally from Perth and now based in Sydney, Catherine joined Smartline in 1999 with over 25 years of banking experience and qualifications include a Bachelor of Business and an MBA. Catherine has helped hundreds of clients finance houses, semis, terraces and apartments, with the majority of her business coming from word of mouth referrals.