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:
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.;
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.
This Information Outline is provided courtesy of Wright Stell who are experienced in this area of law. They can be located at Level 5, 139 Macquarie Street, Sydney NSW 2000 or call them on (02) 9252 2278 if you would like more information on this legal topic, or you wish to obtain formal advice regarding your situation.
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