This has seen an increasing demand for reverse mortgages. The reverse mortgage market is currently about $1.5 billion in Australia but more growth is expected, with projections of up to $15billion in the next five years.  Reverse mortgages can draw a regular income or lump sum against the equity in your home and  provide much needed cash flow and enhance your quality of life. However, incorrect usage can eat away at this equity.

Tim Stoyles, managing director of financial advisory SWIMM, which specialises in retirement income planning, urges anyone thinking of getting a reverse mortgage to consider the following before signing on the dotted line.

What are Reverse Mortgages?
Reverse mortgages are equity release products that allow you to access funds against the equity in your home without selling it if you are 60 years of age and own your home.

They are called a reverse mortgage because debt is increasing over time as the interest is capitalised in comparison to a traditional home loan where it is decreased over time.

You can either draw down a reverse mortgage as a lump sum, regular income stream or a combination of the both.  It all depends on what you want to achieve – whether to increase your income steam or to do home improvements, cover medical bills or purchases such as a car or a holiday. They can be a very good income source in addition to the pension.

How can a reverse mortgage help meet living costs?
Reverse mortgages are a means for individuals in their retirement to increase their pension income and that way to afford the cost of living without having to sell the home and move. Your financial advisor should look at all possible avenues before recommending a reverse mortgage, such as relative support, maximum DSS entitlements and superannuation.

How does it work?
You can borrow up to a certain percentage of the value of your home, with that percentage being determined by the age of the youngest owner of the property - again the minimum age of the youngest owner must be 60 years. You can borrow up to 50% of the value of the property, either as a lump sum or, as we recommend, as an income stream – ideally as an annuity. This way you will reduce the interest costs and stretch out the impact on your equity.

It is a viable option for anyone that is over 60 years of age who does not want to sell their home and is struggling to live of their current income or pension.

Must Do’s
Make sure the reverse mortgage you are getting has got equity protection in place (meaning you can only borrow against 50 per cent of your equity while protecting the other 50 per cent).

Do not use a reverse mortgage to finance risky investments like share trading.

See a qualified financial adviser to look at alternatives, not just a mortgage broker. If a reverse mortgage is necessary, a financial adviser will help you choose the right product to complement existing income streams.

Tim Stoyles is the managing director of SWIMM (Sydney Wyde Investments and Mortgage Management) - an innovative retirement financial advisory specialising in reverse mortgages and offering zero or low cost consultation nationally. For details log onto www.swimm.com.au or call 1300 850 247

Case Study
We did have a woman who took out a reverse mortgage 18 month ago she borrowed $60 000 against her home worth $550 000 and she was 69 at the time. And now, she is 70. She said that her mortgage has increased to $74 000 with the compounded interest and she is concerned because she is struggling to live of the pension, she lives with a partner who is not on the title of the property and therefore she is only able to borrow 25% of the value of that home. Which she believes to be worth $550 000 – so she can actually access up to 25% which is approximately $130 000 – so what we were suggesting was, to refinance that $74 000 dollars then draw down the difference between the $130 000 and the $74 000 as a 5 year annuity or even better don’t draw
down the difference of $56 000, and just leave it at what she actually needs and perhaps in a another 5 years time after the annuity is completed there still should be or could be access to another amount of equity for another 5 year annuity

So that way we can probably cover her for 10 years, to give her the additional income toward her pension’s shortfall – essentially what we are trying to achieve with these reverse mortgage products.