Reverse is a term usually reserved for your car’s gearbox and anti-ageing creams, so how did it end up in the world of superannuation, retirement and mortgages?
A reverse mortgage, in many opinions, is something to be avoided. And one of the best ways to avoid a reverse mortgage can be to have a strong super fund come retirement.
So what is a reverse mortgage, and how can you use superannuation to reduce the need to access one in the future?
What is a reverse mortgage?
You’ll probably be familiar with the term ‘mortgage’, where you borrow money to buy a house. Flip that around, and you have a reverse mortgage. You already own the house but are low on cash – so you borrow money against the value of your property (usually about 15 – 40 per cent of the value of the home).
Instead of decreasing over time as you pay it off (like a normal mortgage), the value will increase as the fees and interest you would usually pay are tacked on to the loan balance.
In most cases you wouldn’t need to make regular repayments on your loan, but you will be expected to pay it back when you sell the property.
Who needs a reverse mortgage?
Most reverse mortgagees in Australia are homeowners aged 60 years or older. The one thing they all have in common is that they need or want extra cash, and are willing to use their home as equity to get it.
According to data commissioned by the Senior Australians Equity Release Association of Lenders (SEQUAL) and conducted by Deloitte, there were more than 42,000 reverse mortgage facilities in Australia at December 21, 2011. The report also revealed that the average age of borrowers was 74, although the trend is leaning towards the 60-70 age group.
Study leader and Deloitte banking partner James Hickey noted that the average loan size had increased from $51,148 in the first 2005 study to $78,250 in 2011. The study shows that almost one in five (18%) of these reverse mortgages were used to make home improvements, 16% were to repay debts, and 15% went to supplementing retirement incomes.
Why can reverse be deemed as negative?
Even though they can provide a lot of cash quickly, there are plenty of sceptics for this scheme.
The Australian Housing and Urban Research Institute (AHURi) cites the fall of property values, negative equity and rising interest rates as potential risks. This means the costs and benefits can be unpredictable, plus the interest rates charged on reverse mortgages are generally higher than normal mortgages.
How can you avoid a reverse mortgage?
If you reach your retirement years and are short on cash, one option is to sell your home and move into a smaller apartment or studio, or even a retirement village. Depending on the value of your home and the cost of the smaller abode, you may be able to free up some cash without reverting to a reverse mortgage.
Another way to avoid this situation is to ensure you’ve paid off your mortgage before you retire, according to an article from the Wharton University of Pennsylvania. If you go into retirement with an outstanding balance on this loan, you may still be required to make your normal weekly or monthly payments – which could be much harder without a steady income or strong retirement savings to draw upon.
A healthy super balance could also help you avoid a reverse mortgage, because when it comes time for you to access your super, you could use this to make those home improvements, repay debts or supplement your retirement income.
Take a look at the retirement standard from the Association of Superannuation Funds of Australia, which offers benchmarks on the savings you’ll need per year to retire in a modest or comfortable lifestyle as either a single or a couple. These figures can give you an idea of how much you may need to save before retirement so you can start planning and working on managing and topping up your super fund.
Would you take out a reverse mortgage if you needed to?