Reverse mortgages should be considered where appropriate for the client. 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 recent client advice may help explain how reverse mortgages can be used to 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. 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. 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.
As you can see, used carefully, they can be very useful. They can often be appropriate to your client and very much in your client’s best interests.