Lifeline For Retirees

Equity in the home can be released to top up retirement funds – but there are catches

- David Thornton

Equity in the home can be released to top up retirement funds – but there are catches

Reverse mortgages may be the lifeline that cash-strapped retirees need during this global pandemic and beyond, but they should proceed with caution.

Sometimes referred to as “lifetime loans”, reverse mortgages use the equity in your property as security for a loan. In contrast to regular loans, reverse mortgage interest is added to the loan principal and the whole lot is paid off when you sell your home or die.

The amount you can borrow is a function of your age and the value of your home. The loan to value ratio (LVR) starts at 15% at age 60 before increasing in roughly 1% increments every year. So if you’re 80, you’ll be able to borrow up to 35%.

If your accumulated interest and principal reach the value of your home, you won’t get kicked out due to a forced sale, nor have debt continue accumulating. The negative equity protections legislated in 2012 prohibit both of those scenarios. And if the home is sold for less than the amount of the principal and interest owed, the bank will be left holding the bag.

With fixed-income assets paying out next to nothing these days, reverse mortgages may be a useful way to fund everyday living expenses. They can be paid out in lump sums, flexible drawdowns or, for those with a dangerous spending appetite, regular instalments similar to an annuity.