Reverse Mortgage and Pensioner Loans: Are They Safe and Worth It?
By Joe Vizzone
You can’t eat bricks and mortar.
Plenty of Sydney retirees are millionaires but they’re going hungry. They all own million dollar houses but don’t have any cash and so they struggle financially and do without a lot of things they would like to be doing.
More and more of them are looking at what are generally called “Reverse Mortgages”. I call them Pensioner Loans.
You can go to a bank like St George and the Commonwealth Bank and they will lend usually up to 20% of the value of your home and while they charge you interest, no payment is required until the property is sold while you are alive, or if you don’t sell it, it is to be repaid after your death.
The interest is compounded so you pay interest on interest but historically, rises in your property’s value have more than covered the interest charges. But if house prices fall or do not cover the accruing interest, your equity in the property will be diminished.
I find most of my client’s struggle to embrace a Pensioner Loan as they are worried that their kids will be burdened by the interest over the house. Sure, they’ll get a little bit less than if there was no loan, but they will still get plenty as you can only borrow up to 20% of the value of the house and, historically, house values go up over time. I tell them they have done the hard yards and they are entitled to some enjoyment and financial freedom in the latter parts of their lives. I have no great difficulty in recommending reverse mortgages offered by the larger banks to my clients.
On the other hand, I advise against shared equity arrangements where a bank or lending institution “buys” a share of your property. They market it as though you don’t go into debt. They actually work on guaranteeing themselves an increase in the value of their share which basically gives them a better rate of interest. And worse when the time comes to sell the property, you have to go by their valuation. Unscrupulous operators can then artificially inflate the value of the property and demand their share of the inflated value. Keep away from them.
Speak to a Solicitor who knows these products.
Stick to Pensioner Loans with the big banks and start eating again. Good food tastes wonderful. There will be plenty left over for the kids.
Joe Vizzone has over 30 years experience as a Property Lawyer. If you have any query about this article or wish for him to take on your property matter, please contact us on 9667 1271 or email email@example.com