'Busting misperceptions on equity release'
EQUITY RELEASE MYTHS BUSTED
Smooth Retirement’s founder and CEO Scott Phillips tackles some of the most common misperceptions around equity release and reverse mortgages.
Top five reverse mortgage myths – busted!
Not true. Australian borrowers are protected by law, known as the “No Negative Equity Guarantee” (NNEG), and cannot owe lenders more than their home is worth, regardless of what happens to the value of their property.
No. Unlike a traditional home loan, reverse mortgage borrowers retain ownership of their homes, and the title remains in the name of the borrower. This means you cannot lose ownership of your home.*
No. You cannot be forcibly removed from your home by the lender. You do need to meet simple obligations such as remaining living in the home, keeping the council rates paid and the home insured.*
No. A borrower cannot be forced to sell their home, at any time, against their will. Even if their home devalues dramatically, the borrower can continue to live in it for as long as they choose, repaying the lender only when the house is sold in the future.*
A reverse mortgage can be an extremely valuable and powerful retirement planning tool that can greatly increase income and capital in retirement when used sensibly and as party of a retirement-long strategy.
In its most recent review (August 2018), ASIC found that reverse mortgages could help retirees fund a better quality of life and reduce financial stress, but some borrowers did not fully understand the effects of compound interest on their loans and how this could impact their future needs. The regulator believes that there will be greater demand for reverse mortgages in the future with more products released to the market as Australia’s population ages.
While using some capital now will reduce the amount of equity you have in your home over time, with good planning you can make sure you have enough in later years to fund aged care and your children’s inheritance.
There is a significant financial cost to selling a home, not to mention an emotional one – with the vast majority of retirees (83%) stating they wish to age in place. Selling up may also impact significantly on the amount of government pension you are eligible to receive going forward.
Reverse mortgages are tightly regulated and like all banking products, this includes measures to protect vulnerable clients. These loans have stringent lending criteria. All applicants must prove that they have adequate equity in their home and are able to keep their property properly insured and maintained throughout the life of the loan. They are also all required by law to seek independent legal advice.
**Terms and conditions apply and you will have responsibilities that you are required to meet under the contract.