Going Into Reverse

How often have you heard the old comeback - this is now, that was then? In the game of money education, what might have been good advice or a good summation of alternatives for investors, wealth builders and those hoping that their retirement nest egg lasts until their funeral can change over time.

Of course, this should not surprise anyone as the smarties in financial institutions are always looking to make products that will solve a problem and make them money.

A few years back anyone looking despondently at their retirement sum was faced with few alternative strategies.

What could you do?
They could grin and bear a more humble life in retirement, accessing some assistance from the Federal Government's funding for retirees via Centrelink. They could choose to work longer, or part-time re-engineering retirement as they thought they knew it.

Others have had to sell their house to build up their cash reserves, which not only might have meant a lesser quality abode but a move to a new area where existing networks could be lost. Some parents might have found that they had to move away from family to make retirement more affordable.

It makes sense to plan
Barring bad luck, a lot of these unfortunate developments were the direct result of poor planning at earlier ages, while others, to be fair, could have been victims of bad luck.

What are reverse mortgages?
Whatever the reason, the latest product to ride to the rescue of retirees is something called a reverse mortgage. This is the tag used in the US and while it's used here, these unusual mortgages are sometimes called Equity Release Plans (ERPs).

They work, believe it or not, like a mortgage but in reverse.

Imagine someone who has a house worth $1 million but has a disappointing super lump sum. This retiree could take out a loan for $350,000, which could be drawn down over the course of retirement.

Things you should know
The main points to know about these mortgages are:

•  Money can be accessed without selling the property
•  No repayments are required during the loan term with the total interest, fees and charges being taken out of the estate on the borrower's death
•  The Sydney Morning Herald recently ran an example to show what can happen over time. "Someone borrowing $100,000 at 8% will have to pay back $220,000 in interest and principal after 10 years, plus any fees," they reported.
•  While the loan cuts into the equity that the owners have in their property, if land values rise strongly it can offset some part of the outlays to access the money
•  The interest rates charged are more like the higher standard variable interest rates on home loans and there are fees as well
•  A few lenders offer a fixed rate of interest but this can be a tough game to guess accurately so it adds another risk for anyone wanting to play this game.
•  The most lenders will advance is 45% of the home's value but the older you are the more you can get
•  Some give lump sums while others allow you to draw down periodically.

Other things to watch out for
•  Centrelink payments can be affected - extra money can do that
•  Centrelink has a product for some Australians at a lower interest rates and with no fees.

Word of warning
Anyone considering these products should do as much homework as possible. One word of warning is that this is a money play that could split a family or two. This product has Baby Boomer written all over it and it could prove to be the product that Generation X and Y didn't have to have!

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