Guide to Reverse Mortgages: Know The Risks

Kathy Swan from the ABC’s Inside Business program recently had a look at Reverse Mortgages:

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Something very odd is happening in the world of property-based borrowing. Rather than the young looking for their first home, it’s the parents and grandparents who now represent the fastest growing segment in the market. A study released this week found that older Australians borrowed $560 million through reverse mortgages on their home last year, almost double the figure for 2005 … there are some serious risks for the new wave of elderly borrowers.

The family home is fast becoming the new cash cow for cash-strapped retirees, thanks to what’s called reverse mortgages. They’re not new but they’ve never been so popular. That’s because retirees can turn the value of their biggest asset, their home, into money they can spend now without selling up and moving and without having to pay anything back until they do actually move or die.

What Swan found is that people considering Reverse Mortgages need to make sure they are aware of all the risks and this was backed up by a recent report on Reverse Mortages by Choice Magazine as reported on ABC radio:

A new report is warning that retired people can risk losing their homes when they sign up for so-called reverse mortgages.

Reverse mortgages let older homeowners borrow against the value of their property to top up their income.

But an investigation by the independent consumer watchdog, CHOICE, has found that mortgage brokers are encouraging people to take out loans for more than they need.

And it’s found serious problems with loans from even mainstream banks.

Some had default clauses that could be triggered by minor oversights such as failing to pay the rates….

You can watch the Inside Business story “Reverse mortgage trend brings risks for borrowers” by playing the Video (6 minutes in length)



If you can’t see the video player than you should open this URL in Windows Media Player:
http://www.abc.net.au/reslib/200704/r138982_475612.asx

6 thoughts on “Guide to Reverse Mortgages: Know The Risks”

  1. In the USA, it is now a HUD regulated program. With the cost of health care here, and the downward spile of Social Security and the upward swing of gas prices…….it is a great option for some seniors IMHO. Why not use the equity in your home so you can live better? They dont make you sell till your dead……..only spoilded kids who want the house (but never put a dime in it) will complain.

  2. Now that I’ve been reading a lot about it, borrowers – especially the elderly – are going to get into it deeper than they plan to.

  3. “The director of policy and campaigns at the Consumer Action Law Centre, Gerard Brody, said … the most important thing to ensure in a reverse mortgage was a no-negative-equity guarantee – which made sure the size of the loan did not grow larger than the value of the property.

    The majority of borrowers interviewed by the commission were unaware of the tough penalties imposed if they breached their loan conditions. These breaches typically occur when borrowers let other people live in the house without the lender’s permission; fail to pay council rates or home insurance, or allow the property to deteriorate in value. Penalties can include having to repay the loan completely, having to sell the property, or paying a fine.”
    – excerpt from Elderly unaware of reverse risk (SMH)

  4. When it comes to deciding whether a Reverse Mortgage is a good investment or not, many senior homeowners don’t really understand their options. For some, a reverse mortgage is a way out of debt, or a way to pay for a child’s education. Others see a Reverse Mortgage as just another way for the bank to make money.

    The truth of the matter is, deciding whether a Reverse Mortgage is a good investment or not depends on the borrowers unique situation. It also depends on factors that can only be calculated with a special tool.

  5. It will not be long before the credit crunch hits Oz and all those older home owners are going to find out that a house is for living in not an ATM machine.

  6. One disadvantage is the cost of a reverse mortgage, which can be very expensive. This is because of the rising-debt nature of the loans. A typical reverse mortgage may be $300 monthly with a yearly interest rate of 12% compounded monthly.

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