Dover believes reverse mortgages should be considered where appropriate for the client and will in many cases be appropriate for older clients struggling to get by on the old age pension who have reasonably large amounts locked up in their family home.
Dover encourages advisers to see reverse mortgages as a planning tool for older clients.
ASIC describes a reverse mortgage as follows:
A reverse mortgage allows you to borrow money using the equity in your home as security. The loan can be taken as a lump sum, a regular income stream, a line of credit or a combination of these options.
While no income is required to qualify, credit providers are required by law to lend you money responsibly so not everyone will be able to obtain this type of loan.
Interest is charged like any other loan, except you don’t have to make repayments while you live in your home – the interest compounds over time and is added to your loan balance. You remain the owner of your house and can stay in it for as long as you want.
You must repay the loan in full (including interest and fees) when you sell your home or die or, in most cases, if you move into aged care.
A client example from 2014 may help explain how reverse mortgages can help clients.
The client was suffering from frugality. She could not even afford to get hair done, something which hurt. She had always taken pride in her appearance, and now she could not afford to do so. She lived on her own in Hampton, an up-market suburb between Sandringham and Brighton, in suburban Melbourne. It was the old family home and it was all she had. It was worth about $1,000,000. She was not leaving. Too many memories.
The adviser’s draft SOA only dealt with pension entitlements. The advice reaffirmed that the client was already getting her maximum Centrelink entitlements. Not much joy there.
We encouraged the adviser to have another look at the SOA. He did, and with our input, the final SOA included paragraphs on:
- getting a lodger in, for company and cost sharing; and
- implementing a small scale reverse mortgage strategy to free up $500 cash a week without impacting the old age pension.
The client loved the advice, and is again getting her hair done once a week. This is having a substantial impact on the way she feels about herself – and she is not alone there.
Hampton has one very well over the last two years. The client’s old family home is now worth more than $1,300,000. The $300,000 increase in value swamps the $60,000 home loan. It was a great call and a great strategy.
As you can see, used carefully, reverse mortgages can be very useful. They can often be appropriate to your client and very much in your client’s best interests.
Since 2014 we have become even more aware of how handy reverse mortgages can be. A recent Australian Doctor article penned by Terry McMaster explains how they can be used in effect to equalise the subsidy needed by elderly pensioner parents and to ensure all children share equally in supporting their parents.
This article is reproduced here:
A few safe bets
Dr Jenny’s appointment note suggested she wanted to chat about super. But when we sat down for a coffee it was quickly clear something else was on her mind.
Jenny’s real concern was not her super. She was paying maximum contributions, ie $30,000 a year, in 12 equal monthly instalments, to her high growth account at First State Super. Simple and safe. Her super was fine.
Standing instructions to every doctor at every stage of life.
Jenny’s real concern was her extended family’s group expectation that she subsidise their elderly pensioner parents’ living costs. Grandma and Grandpa were getting on now, and needed extra help around the house, which costs. And with longevity running happily in the family there was no end in sight.
The annual subsidy was about $20,000.
It was not fair. Jenny’s three brothers had good jobs and were doing well. But for some reason the cap was always handed to her. She was the doctor, so she was expected to pay their parents back for all they had done for her. Her brothers did not understand being a doctor did not mean having unlimited financial resources. Jenny had to earn every cent of that $20,000. After paying tax and Medicare levy of more than 40%.
$20,000 a year every year for twenty years at 8% a year compounds to a bit over $1,000,000. Jenny loves her mum and dad, but she has her own young family, and her own retirement years, to think about.
What could she do? Any bright ideas?.
The solution was simple, and something we have recommended many times over the years. Jenny’s parents owned their home in Sydney. It was nothing special, but was still worth about $900,000 and did not count for the old age pension assets test. It was debt free. Unencumbered, as they say.
Jenny suggested her parents speak to Jenny’s bank manager, and borrow that $20,000 every year against the security of their home. The Russell ASX Long Term Investment Report told her Australian property had averaged 10.5% returns over the twenty years to 31 December 2015, and Sydney has done even better than that.
Realistically, there was little chance the slow growing loan would ever get near the fast growing home value. At least in her parents’ lifetime.
It was a safe bet.
The bank manager pulled out a glossy “reverse mortgage” flyer, with pretty pictures, and announced the interest rate would be 6.5% per annum, because it was a reverse mortgage. Nonsense, Jenny snorted, and insisted the interest rate be just 3.9% a year, ie the same as her home loan rate, ie about 3.9%. The difference over 20 years is huge.
The bank manager surrendered once Jenny offered to guarantee the deal. Some say doctors should avoid guarantees. This is a bit simplistic: sometimes giving a guarantee can be very much in a doctor’s best interests, and it was here.
It was another safe bet.
The burden of caring for Jenny’s ageing parents is where it belongs: equally distributed amongst each of the four children, not concentrated on Jenny.
And the loan is clearly not income for Centrelink purposes: there was always a niggling concern Jenny’s regular bank transfers could be deemed to be income, and her parents’ pension cut accordingly. That concern is gone now.
Jenny made sure her three brothers were informed and on-side. She did not want any misunderstandings down the line.
The reckoning day will be when Jenny’s parents finally pass away. Their home will be sold, the bank loan re-paid, and the balance distributed amongst their four children, in equal shares.
This is, of course, good news for Jenny. She was paying all of it and now she is only paying one quarter of it.
Jenny’s three brothers are now paying their fair share.
Jenny’s children, and ultimately her own family, will be much better off.
Jenny was happy, so I let her pay for our coffees.