With the increasing prices of property and rising cost of living due to inflation, today more and more retired Australians are finding themselves asset rich while at the same time growing evermore cash flow poor.
These factors combined with our emotional attachment to our home i.e. family memories, estate for children, etc... has inspired ever more creative lending products. One such lending product is called reverse mortgages.
With a reverse mortgage the borrower give their title of property to the lender in return for up to 45% of their homes value received as either an income stream or lump sum payment. While no repayments are required (as they are capitalised on top of the existing loan balance), the outstanding balance (sum + accrued interest) is repaid either on death or sale of home when ones goes into a retirement home.
Unfortunately rather than a solution to cash flow poor retirees, I see this particular product as a wealth destructor with significant impact on the most vulnerable members of our society.
Over 20 years, your debt will grow from $50,000 to $272,060 (540%+ more than your initial borrowed funds). Reference from CBA Key Information About Reverse Mortgages. Reverse Mortgage Information Statement
The following risks particularly apply to reverse mortgages. Referenced from The AustralianTresuary Department
In addition risks
Sell and downsize and invest the sale proceeds into an income producing investment to fund your needs.
Sell your home to your children/beneficiaries. In return pay children rent, if children borrow to fund the purchase they may also be eligible to recieve tax deductible benefits.
Senior home owner grant. An option agreement for an investor to buy the property at an agreed price today, whilst allowing the owner to remain in their home until they die or move into a nursing home.