Mr Taxman
Change the way you feel about taxes.
Get informed and discover what the taxman doesn't want you to know.
Sharing it with Australia, Mr Taxman is a regular Woman’s Day columist and TV finance commentator
  • click to visit Mr Taxman on Twitter
  • click to visit Mr Taxman on FaceBook
  • rss

Reverse mortgages

Feb 01, 2011

We own our house but rely on the pension for income. We would like to take out a reverse mortgage for $100,000 to renovate our bathroom, buy a car and give our daughter $30,000.  Is this OK?  Eileen, Qld

The "reverse mortgage" product was devised by banks for those over 60 who could borrow up to 40%  against their home but didn’t have to make any repayments. 

Lovely banks?  Don't kid yourself!  Banks are never generous with their money.

Some things in life are simply too good to be true.  And reverse mortgages definitely fit in this category. 

The loan must be repaid when you move out to aged care accommodation or if you die, usually out of the proceeds of the sale of your home. 

Fees and interest (usually higher than home loan rates) are added to the loan balance.   Over time, you're charged interest on the interest (known as compound interest) and that builds up the total amount you owe. 

The effect of compounding interest can be extremely dangerous to your financial health. 
$100,000 borrowed today increases to $226,098 in ten years’ time at 8.5% interest.  And it jumps to $511,204 in 20 years' time.

If house values increase by only 3.5% each year but the loan interest is 8.5%, then any equity that you have in your property will quickly start to narrow.

Please be cautious about the calculators provided by reverse mortgage providers as they generally only show how much you can borrow and not how much you have to repay.

You may not have enough to pay for aged care accommodation or to leave an inheritance (although you can protect a fixed percentage of the value of the property so it cannot be used to repay the debt).

There is also a risk that the loan may rise higher than the value of your home.  Get a "no negative equity guarantee" where you don’t have to repay beyond your home’s value.  This protection may be lost if you don't meet certain conditions, such as maintaining your home to a standard set by the lender.

Aside from the perils of reverse mortgages, your plans may also have a negative impact on your pension.  Centrelink will assess your car as an asset as well as $20,000 of the money given to your daughter based on gifting rules.

Tags: Financial PlanningProperty

Author: Mr Taxman

Comments

Post a New Comment

Media Availability

Are you interested in booking Mr Taxman for a speaking engagement or requesting his viewpoints for an article?

comments-rhsLatest Comments

  • "hello everyone here i am Jack Mark a medical doctor from United Kingdom , i want to share a great testimony of how Dr AKIOYA herbal mixture cream saves me from shame and disgrace, my penis size was..."

    By: jack mark at Oct 14, 2019 8:21PM

    Post: Today Show - Australia's unwanted cash

  • "I was cured of HIV with the used of natural herbs. My name is celina jolly and am from US. I love herbs so much. Most times, injection and drugs are just a waste of time. I was cured 8months ago..."

    By: celina jolly at Oct 14, 2019 4:35PM

    Post: Today Show - Australia's unwanted cash

  • "Knowing Kevin Petersen was the best thing that happened to me as i invested in forex and bitcoins with his and i happy to recommend him to everyone as the best trader. Email..."

    By: Hanna Rosin at Oct 13, 2019 11:20PM

    Post: Foreign currency trading

  • "HOW I GOT MY EX HUSBAND BACK WITH THE HELP OF REAL AND EFFECTIVE SPELL FROM DR Osasu My name is Olivia Jayden, I never thought I will smile again, My husband left me with two kids for one year, All..."

    By: Olivia Jayden at Oct 13, 2019 9:05PM

    Post: Employer obligations checklist

  • "I am sharing this testimony to partners suffering in their relationships because there is an enduring solution. My husband left me and our 2 kids for another woman for 3 years. I tried to be strong..."

    By: care vennr at Oct 13, 2019 6:29AM

    Post: Increasing the superannuation guarantee to 12% won’t fix retirement savings: Grattan Institute