Money

Reverse mortgages: good and bad

Noel Whittaker
Noel Whittaker

INCREASING living expenses mean that many Australians who retire in the next 30 years are going to be doing it tough. 

One way out is to sell the home and rent, another is to take out a reverse mortgage - a loan where there is no obligation to make repayments of principal or interest.  

I like reverse mortgages, if they are used properly, but, as one man I will call Ted, found out, it's very easy to get caught.  He and his wife took out a reverse mortgage in 2007 with a limit of $40,000 and drew it down by instalments to minimise the interest.  To protect himself from rate rises he took an interest rate of 9% "fixed for life".

By 2011 the debt had grown to $47,000, which seemed reasonable in the circumstances, but things took a turn for the worse when his wife died and he decided to move to a more suitable property

This involved paying out the loan but he was horrified to discover that the reverse mortgage provider wanted a "break fee" of $35,000 in addition to the sum owing.  This turned a $47,000 debt into an $82,000 debt.

This was the price of fixing the interest rate.

If rates had gone in the other direction the breaking of the loan contract might have worked in his favour -  he may have got a refund.

So what are the lessons here for anyone who has to resort to a reverse mortgage?  In hindsight, the biggest risk Ted took was the fixed rate loan, which means that retirees may well be safer with a variable rate than a fixed one.  If a variable rate is chosen, borrowers should delay drawing down the mortgage for as long as possible to minimise interest and to reduce the potential term of the loan. 

Also, the essence of a reverse mortgage is it enables the parents to spend money that would normally be left to their children.  If the children can afford it, they should chip in and pay the interest on their parents' loan, so the debt does not increase.

Topics:  noel whittaker




Two drivers allegedly more than three times over the limit

"People just need to consider their plan B.”

A special week for Legacy

NOT FORGOTTEN: Legacy widows lay wreaths at the Cenotaph in Memorial Park, Grafton, on Sunday, to start Legacy Week, the organisation's only fundraiser for the year.

Legacy week is vital for widows of Australian servicemen.

Improved passenger numbers protect Grafton Airport

Clarence Valley Council airports coordinator, Geoff Smith, and Clarence Valley Mayor, Richie Williamson, at the recently completed Grafton airport upgrade.

Regional Express posts a loss, but Grafton Airport won't be affected

Latest deals and offers

Mick Jagger to pay £2.5m to the woman carrying his baby

Mick Jagger is reportedly paying millions to pregnant ballerina

Navy man Keller ready to marry a perfect stranger

Former Navy engineer Keller is a participant in season three of Married At First Sight.

Tattoos are just the surface of Married At First Sight groom.

Ozzy cheated with 5 women in 5 countries: Sharon

Sharon Osbourne claims her husband Ozzy has cheated on her

The Big Music Quiz gives The Block a run for its money

Darren McMullen hosts the TV series The Big Music Quiz.

NEW challenger in TV ratings race shakes up Sunday night.

Britney Spears calls Carpool Karaoke appearance "awkward"

Britney Spears admits her Carpool Karaoke segment was "awkward"

Mariah Carey's sister Alison arrested for prostitution

Mariah Carey's sister has been arrested on charges of prostitution.

REVEALED: Pat Rafter's $18m Coast house on the market

Check out the photos of the Coast's most expensive property for sale

The "correction we had to have" in Gladstone's rentals

UPWARD MARCH: The rental vacancy rate in Gladstone has improved for the first time in more than a year, providing a confidence boost in the market.

Vacancy rates improve with signs that things are getting betterF

ISLAND FOR SALE: Cheap Fraser Coast island drops price again

Suna Island in the Great Sandy Strait will be auctioned by Ray White Hervey Bay on Saturday morning.

This is the cheapest island you will find for sale in Australia

How a family home can fit on a 250sq m block

This is what you can build on 250m2.

Here's the floor plan of a home built on 250sq m

Investors eye Gladstone's $4m island with resort approval

UP FOR SALE: Turtle Island is on the market.

CHINESE and Sydney investors flag interest in Gladstone island.

Take a sneak peek at this $19m Whitsunday mansion

Mandalay House features a private helipad.

Mandalay is currently on the market with an asking price of $19m