EQUITY RELEASE PLANS OR REVERSE MORTGAGES
Equity Release Plans commonly referred to as ‘Reverse Mortgages’
As the Baby Boomer generation moves towards retirement, statistics show that
Australians are living longer and working longer. The Baby Boomer generation
post World War II has been the most dynamic and successful generation in
Australia’s history. They have relied heavily on the increasing value of their
residences to support a consumer orientated life style to provide not only for
themselves, but also for their children. It is unlikely the Baby boomer
generation will abandon the habit of a lifetime and freely cut spending and
lifestyle. The children, or ‘generation x’ as they are known, have grown up in
an era of compulsory superannuation and therefore that generation will be much
better placed to enter into retirement in the future with the support of
superannuation funds.
As is commonly recognised, the Baby Boomer generation moving into retirement
now is often an asset rich, cash poor generation with the bulk of their assets
in their residential home. As a consequence, in order to fund a long and
pleasant retirement, the only solution has, in the past, been to sell the
residential home thereby downsizing and often, subsequently, moving out of an
area where they have been accustomed to living.
The alternative to selling the home and moving is an equity release plan.
These plans have been gaining popularity as they do not require the sale of the
home and they do not require the retirees to go through the trauma of moving.
They have been highly successful in the United States and United Kingdom and
with tacit government support, they are now becoming extremely popular in
Australia. To enter into an equity release plan is probably the last major
financial decision a person will take during their life time and therefore it is
important that they fully understand every aspect of the transaction.
There are three Equity Release Plans:
Reverse Mortgage
A loan advanced as a lump sum or regular payments to a home owning retiree
enabling them to access the equity in their own home. The loan is a percentage
of the property value and no repayments are made during the life of the loan.
The loan is paid off when the borrower dies, sells their property or moves into
aged care.
Home Reversion Plan
Home Reversion Plans allow home owners to receive a lump sum or regular
payment in return for a share in the value of their home. Home owners do not
make regular payments to the provider or incur interest as there is no loan
involved. Instead, when they sell the property, when they die or move into care,
they give the provider the stated share of the sale proceeds. This transaction
is, in fact, a conveyance rather than a mortgage.
Shared Appreciation/Equity Mortgage
Shared Equity Loans are a new concept in the Australian mortgage market
essentially allowing individuals to borrow on preferential terms in return for a
share in the appreciation (equity gain) in the value of the property during the
course of the loan.
The most popular form of Equity Release Plan is the Reverse Mortgage.
When considering a Reverse Mortgage, there are three important questions
which must be asked and answered:
- How long am I likely to live;
- What will happen to interest rates in the future; and
- What will happen to property values in the future.
These are important questions because in a Reverse Mortgage, no repayments
are made to the lender. Therefore, the interest is capitilised. This means that
the interest will compound and continue to accrue. The accruing interest may or
may not be covered by increases in the value of the property. The increase in
property value does not need to be the same or a greater percentage than the
actual interest rate charged as the loan is only a proportion of the property
value. For instance, at age 60, the maximum amount which can be borrowed is 15%
of the value of the property, increasing to 40% of the value of the property at
age 85 and over. The maximum loan amount is based on the value of the property
and the youngest borrowers age. The borrowers income is not assessed as no
repayments are required.
Most Reverse Mortgages are subject to a ‘no negative equity guarantee’ which
means that the total loan repayable at the time of death or sale, cannot exceed
the net realisable value of the property at that time when the loan is required
to be paid. The borrower or their estate are not liable to repay any shortfall
to the lender should the value of the property be insufficient to repay the
loan. At the end of the loan term, the borrower or their estate has the option
to repay the loan and retain the property or to sell the property and repay the
lender from the sale proceeds.
Most Reverse Mortgages contain an option whereby the interest rate can be
fixed for the term of the loan.
Wright Stell Lawyers are experts in Senior Law. We are equity release
specialists and have invested heavily in understanding the various Equity
Release Plans. We are members of the Mortgage and Finance Association of
Australia and abide by the Code of Conduct of Sequal – Senior Australians Equity
Release Association of Lenders. Importantly, we can provide unbiased and
impartial advice with respect to all documentation for Equity Release Plans. We
provide such advice to seniors and, where appropriate and if requested, to
members of their family.
Things to consider when looking at Equity Release Plans are:
- Impact that it may have on Centrelink benefits, although, if structured
properly, there will be no impact on Centrelink benefits with a substantial
benefit to enjoyment of life.
- Portability as to whether a lender will allow the Reverse Mortgage to be
transferred to another property should the retiree consider moving to a new
home.
- Whether the funds from a Reverse Mortgage can be used as a bond for aged
care, and whether the existing home can be rented out for a period to offset
interest on the Reverse Mortgage.
- Purpose of borrowing. Money can be borrowed for any worthwhile purpose
such as:
- Relieving financial pressure;
- Purchase of luxury items – Winnebago, car, holiday etc.;
- Home improvements;
- Lifestyle or health care;
- Financial retirement strategy.
Payments can be made by either:
- A single lump sump payment;
- A regular income supplement payment; or
- A line of credit where funds are drawn as needed.
The applicable legislation states that you must obtain legal advice when you
receive your loan contract and mortgage documents before entering into an Equity
Release Loan.
As experts in senior and elder law, we are able to provide such advice not
only on the mortgage documents but on the whole structure of your life in
retirement including advice with respect to Wills, Powers of Attorney and
Guardian
