Reverse Home Loans for Seniors, to stay in their own home
We will undoubtedly hear more of a financial strategy that has been given prominence in recent years, and was in the news again this week. It enables pensioners to borrow against their home, and is known as a reverse mortgage. Most seniors are still wary of putting their home in jeopardy, despite financial institutions packaging them to avoid risk to clients’ ownership.
Their wariness is justified. Saving to own a home is a financially sound strategy because inflation works in the owners’ favour, gains are not subject to capital gains tax, it is not included in the asset test for the pension, and the value of the asset compounds each year. Furthermore there is an immediate and continuing benefit in not having to pay rent whereas money in superannuation is locked away until retirement age, soon to be 70 years of age. Superannuation benefits are also eroded by inflation, and are greatly reduced in market collapses such as occurred in the 2008 global financial crisis.
Pros and cons of reverse mortgages
Borrowing against home equity, when unable to afford to pay off the debt, soon sacrifices these benefits, as the debt compounds. Some retirees do not necessarily mind. They are happy to continue to spend what they have while they can, seeing no point in leaving an inheritance for their children. They reckon they have paid their taxes, and the state should look after them when their money is gone.
The state has a divided interest. On one hand they wish to cut the sky-rocketing cost of care as the population ages, with fewer workers to support the elderly. They believe users should pay even if it means tapping into the money tied up in their home. On the other hand the cheapest option for aged care is to reduce accommodation costs by keeping them at home for as long as possible with the support of community services.
The Australian dream of home ownership is still strong, but it is becoming more unrealistic as prices climb. Many elderly Australians, particularly in Sydney and Melbourne, have benefitted financially from windfall gains in the value of their homes in recent years making them asset rich but income poor. Reverse mortgages, sensibly structured to avoid forced selling, may be a solution for them, allowing them to pay their rates and continue to live at home.
It is not just the cost of remaining in the family home for the elderly that is limiting. There is the problem of health and physical vigour. Some frail pensioners live in squalor unnecessarily when if they sold their home they would have more than enough to live in comfortable retirement quarters with support when needed.
Pop-Star puts the family home on the market.
Pop-Star and Mrs Pop-Star, both not far off 80, have been mulling over these questions for some time, and a few months ago decided to shift into a retirement village after finding a unit that suited their needs.
Australian retirees have many quality options. Most conform to a high standard, resembling tourist resorts, with recreational and entertaining facilities. The social advantages of communal living, and the safety of a gated compound are other benefits. It is also appealing to know that maintenance will be attended to even when away.
It is helpful if there is a nursing home nearby so that it is easier to visit a partner who has to be admitted. Most facilities provide community care in one’s own unit when required, but this is not always adequate for example should one have a stroke. The village Pop-Star has selected also has a dementia unit.
Points worth considering when making decisions about one’s future.
Keep your family informed. They may be affected, and could be most helpful.
Many elderly are negative and are adamant they will not move. They should think of the many positive considerations.
Some units may be too expensive with operators setting prices above what may be realised from selling the family home. Cheaper options could be available.
It is important to read the fine print in contracts, and it may be worth the fee to have a solicitor scan and interpret the documents before signing.
Moving into a retirement village invariably impacts upon one’s financial status. Centrelink will need to be informed, and they can help with financial advice if needed.
Best wishes to all retirees in their enjoyment of life be it in their own home, or in a retirement village.