Crystal Wealth Newsroom
Why reverse mortgages are becoming a viable tactic
Over the past year or two, we’ve seen an increasing number of clients exploring reverse mortgages as an alternate way of accessing capital by releasing equity in their home. And while it may not have been the most attractive of propositions a few years ago, recently the appeal factor’s increased.
“The interest rates charged for reverse mortgages three or four years ago were high,” says John McIlroy, Crystal Wealth’s executive director, “and that didn’t make it a viable option for too many people.
“However, lenders are putting some good products together and they’re becoming another part of the strategy we can use for clients.”
A reverse mortgage is essentially a way of accessing the capital in your property. Whereas it used to be in the form of a lump sum, lenders are now offering lines of credit, as well as regular payments as options, too. The mortgage is then repaid when you move out of the home or sell it, or depending on the lender you can make voluntary repayments along the way, too.
“We’ve seen clients use it because they need to do some home improvements because they want to gift some money, have a big medical expense, or simply because they don’t have enough super and need to supplement it on a regular basis, says John.
Reverse mortgage in action
John has experience of reverse mortgages on a personal level too, his mother used this option to enable her to gift money to her grandchildren.
“My mum wanted to see her grandchildren enjoy the money she gave them, rather than leaving it to them as an inheritance, so she took out a small reverse mortgage on her property.
“It was an expense, but it was a worthwhile thing to do – she certainly enjoyed seeing the joy it brought her grandchildren.”
The amount you can access generally depends on your age, and you can apply for more the older you get. According to Moneysmart.gov.au, you’re likely to be able to borrow up to 15-20% of your home value aged 60, and that generally increases by 1% each year – at 65, you may be able to borrow up to 20-25% of the value of your home.
It can be used to enable people to stay put as they get older – as well as being used as an estate-planning strategy.
“Theoretically, say you wanted to stay in your home but needed to do some work on the property to make it suitable. You could take a reverse mortgage for $50,000, invest it in the property.
“At 6% interest that $50,000 would be worth $67,500 in five years time, $90,000 in ten years, just with accumulating interest, But If your house was worth $1.5m, and the house appreciated by 2%, it would be worth $1.65m in five years and $1.82m in 10 years, so from an estate planning perspective it can make sense, too.”
Another estate planning consideration is a no negative equity guarantee offered by a number of lenders, ensuring you can’t end up owing more than the property’s worth.
If you would like to discuss how you could incorporate a reverse mortgage into you estate planning or wealth creation, speak to John or one of the team at Crystal Wealth today.