Reverse Mortgage Loan Blog

With the relatively recent arrival of reverse mortgages onto the financial scene, cash poor-asset rich retirees could become an endangered species.

But a recent report by Cannex highlights the importance of choosing a reverse mortgage carefully.

It’s a product with the potential to do more than unlock the equity in your home, it could eat it whole.

Reverse mortgages are pitched at retirees who own their own home but find themselves in the difficult position of being asset rich but cash poor.

The rise in the reverse mortgage market - now a $1.81 billion sector, points to a significant number of people who find themselves in this predicament.

In fact, research group NATSEM found the family home is the single most important asset for the over-55s, accounting for more than 45 per cent of the wealth of the average 65-year-old.

The problem is that while family homes have great sentimental value, they don’t generate income.

That’s where reverse mortgages come in, letting senior home owners access home equity often built up over decades.

The opposite of a traditional “forward” mortgage, a reverse mortgage works by letting you re-mortgage your home, receiving regular payments or a one-off lump sum.

On the plus side, nothing has to be repaid until you sell up or die.

However, the catch is that interest on the loan builds up from day one.

And just as the power of compounding interest can work in favour of investors, it can work against anyone with a reverse mortgage.

According to Cannex, if you borrow $50,000 through a reverse mortgage at an annual interest rate of 8.75 per cent (reverse mortgage rates tend to be higher than home loan rates) the outstanding debt will more than double to $119,300 in just 10 years.

Add just half a percent to the rate, and the amount outstanding bloats out to $125,600 over the same period.

Now, there are many good reasons for retirees to tap into their available assets to enjoy a decent lifestyle, and there’s no doubt reverse mortgages can be a welcome solution for seniors living a meagre existence from the confines of a valuable property.

But I stress the need to be careful about selecting a reverse mortgage.

One feature to regard as a must-have is a “No Negative Equity Guarantee”.

This ensures the outstanding debt will never exceed the value of the property.

If you’re thinking about a reverse mortgage, I recommend you check out the latest Cannex reverse mortgage star ratings at www.cannex.com.au

It’s interesting that after reviewing 17 reverse mortgage providers the research group awarded its highest 5-star rating to just two - ABN AMRO and Bluestone.

Found here.

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