What is a Reverse Mortgage or Home Equity Release?
A Reverse Mortgage or Home Equity Release refers to a credit facility known as an ‘Equity Release Plan‘ which allows people (usually retirees) to extract an amount of cash (either as a lump sum payment or an income stream) from their home (residential property) without the requirement to make any type of repayments during the term of the credit facility or plan.
‘Equity Release Plan’ refers to a plan or system that allows for the release of equity in a residential property for the purpose of providing you with additional funds to support your lifestyle in retirement.
They are more commonly referred to as ‘Reverse Mortgages’, ‘Equity Release Loans’ or ‘Home Equity Release’ and sometimes as ‘Reverse Equity Products’, ‘Equity Release Products’, ‘Seniors Home Equity Loans’, “Home Reversion Schemes’ and ‘Shared Appreciation Mortgages’.
There are typically 2 forms of Home Equity Release Products:-
Reverse Mortgage* – a loan secured with a first mortgage over a residential property allowing the borrower to access the equity in their property
Home Reversion Scheme* – the customer sells a share of their property to a funds provider for less than its market value.
How does it work?
An ‘Equity Release Plan’ allows you and your spouse/partner – provided you are both 60 years of age or over – to convert the equity in your home into cash which you can use to support or better your lifestyle in retirement.
You don’t lose ownership or the right to live in your property and there is no repayment or interest due during the term of the Plan. There is a requirement for the Equity Release Plan to be repaid when either of the following occurs:
- the property is sold,
- the last surviving funds recipient moves out of the property, or
- upon death of the last surviving funds recipient.
The equity extracted from your property or the available funds from the plan can be paid in several ways:
- as a single lump sum payment
- as a regular monthly income payment
- as a line of credit allowing access to the funds as and when required
- as a combination of the above options
The amount of money you can access through your Plan is based on a percentage of the market value of your property determined by the age of the youngest applicant. As a general rule, you can access 15% of your property value at age 60 rising to 50% by age 90.
Should you have an existing mortgage, your Equity Release will firstly be used to repay the mortgage and then any surplus will be available to you.
How much will an Equity Release Plan cost?
In the case of a Reverse Mortgage, interest is accrued on a monthly basis and capitalised to the amount of funds released. The total loan amount to be repaid to the lender will depend on the initial amount released and the amount of interest accrued over the term of the Plan.
In the case of a Home Reversion Scheme, there is no interest charged, as you receive a cash amount in exchange for a percentage ownership of your property. The total amount to be repaid to the funds provider is based on an upfront agreed set percentage of the sale proceeds of your property.
Let’s look at some examples of how an Equity Release Plan may work for you; Helen and Theo live in an outer suburb of Melbourne. They own their home which is worth $380,000. Helen is 78, Theo is 79; they have no superannuation remaining and are living on the aged pension. Their children and families live in Adelaide and Brisbane.
They are both active within the community and would never live anywhere else, but wish that they could see more of their children and spend more time with their grandchildren and great grandchildren. They find it difficult to keep up with the cost of living and maintenance needed around the home and can’t afford to travel interstate as often as they would like. If only they had a larger monthly income allowing them to live a little more.
Helen and Theo decided to implement an Equity Release Plan.
They chose a Reverse Mortgage with a variable interest rate and decided to receive their release of funds as a combination of a lump sum and regular monthly income payment over 10 years. Based on Helen’s age of 78, they were able to access up to $125,400 which was equivalent to 33% of their property’s value.
They arranged to receive the funds as an immediate lump sum release of $17000 and a monthly income of $900 for the next 10 years.
Helen and Theo are now keeping up with the cost of home maintenance and have treated themselves by installing a portable spa and gazebo giving them a peaceful retreat where they can spend some quality time relaxing on those warm summer evenings. They now regularly travel interstate to visit their children and spend more quality time with their grandchildren and great grandchildren. They are also considering an overseas trip to New Zealand to visit Theo’s sister who they haven’t seen for 20 years.
With the use of a Reverse Mortgage, Helen and Theo feel as though they have come back to life and are experiencing a refreshing change. They worked long and hard for many years to own their home and feel that they are now responsibly using the value of their home to adequately support them in retirement and add some zest to their lifestyle. They are not burdened with loan repayments, can still live in their home for as long as they like and may even apply for further advances at any time in the future as the amount they can access increases with their age.
Reg and Bonny are both aged 70 and still have a mortgage of $25,000 owing on their home worth $500,000. They have used up the small amount of superannuation they had due to Reg being forced into early retirement at 58 due to an illness and are now living on the Aged Pension. Their home is in much need of a bathroom renovation and other minor improvements which will cost around $27,000.
Their income is insufficient for them to meet their mortgage repayments, save for home improvements and also afford the lifestyle they wanted in retirement. They don’t want to sell their home and move, as they are close to family and friends, like seeing their children and grandchildren regularly, and their garden is their pride and joy. They do not wish to borrow any money as they are tired of being in debt and know that a higher loan repayment will further affect their quality of living. If only they had a little superannuation left, just enough to pay out the mortgage and cover the cost of the bathroom renovation or even a little extra income that would allow them to improve their quality of life.
Reg and Bonny decided to implement an Equity Release Plan.
They chose a Home Reversion Scheme because they liked the feeling of not having a loan debt and not having to worry about interest rates. Based on both their ages being 70, they were able to access up to $150,000 which was equivalent to 30% of their property’s value and they received their release of funds as an upfront lump sum payment.
This meant that after they paid out their existing mortgage they received a lump sum amount of $125,000 to be used in any way they saw fit.
Reg and Bonny no longer have a mortgage repayment, have renovated their bathroom and carried out all necessary home improvements. They even spent a little bit in the garden turning it into what they call Paradise and now when the grandchildren come to stay they have this feeling as though they are on a short holiday. They also sort the assistance of a Lifestyle Financial Planner and invested some of their released funds from which they now draw an income of $1000 every month.
For years Reg and Bonny lived carefully within their means, now with the use of a Home Reversion Scheme, Reg and Bonny have got the means to really live. Due to Reg’s illness every day of life is important to them and they are now extremely happy to be able to afford those little things that are making life just that little bit more special. They have endured some hardships together and are entitled to make the most of their time together in retirement. They no longer think of their home as a weight around their neck but as their saviour and reward for all those years of saving to own it.
They remain the legal owner of their home, are not burdened with debt or interest rates and if they decide to sell earlier than planned they may even receive an Early Sale Rebate.
Equity Release Plans are specialist financial and/or credit products that can add a lot of quality to your latter years but they need to be correctly structured with your current financial situation in mind, so that the cash amount and/or income you receive will not impose any adverse effects on any financial benefits that you may already be receiving i.e. Government Pension or Veteran Affairs Benefits.
To find out more and consider all the great benefits that can be gained from a correctly structured Equity Release Plan, make an appointment to talk with a CommunityBE$T Lifestyle Financial Planner who is also an authorised Financial Advisor. He/she will not only advise on an appropriate Equity Release Plan but also offer further financial advice if required.
To make an appointment, simply email us or phone us on 1300 448 911.
* Equity Release Plans including Reverse Mortgages and home equity Release Loans are subject to application and approval. Terms, conditions and eligibility criteria apply. Fees and charges may be payable.
*The information provided above does not take into account your personal circumstances and is provided as a guide only. You should consider the appropriateness of the information having regard to your objectives, financial situation and needs. You should obtain independent professional advice involving legal, taxation, retirement planning and risk tolerance.