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


Join the Community.

Get your local news, your way.

Stay Connected

Update your news preferences and get the latest news delivered to your inbox.

Moonshine Ochre a shade of Blues

ON STAGE: Gold Coast band Mescalito Blues.

GOLD Coast band Mescalito Blues are a regular fixture

Never weary of Bingham’s music and his crazy heart

George Ryan Bingham is an Americana singer-songwriter currently based in Los Angeles, California.

RYAN Bingham became a global sensation in 2010

Councils back campaign against ‘obscene’ Wicked slogans

Byron Shire Council has joined the fight against Wicked camper van slogans.

BALLINA, Byron councils will write to NSW and Queensland premiers

Latest deals and offers

WATCH: Bong throwing at Nimbin MardiGrass

THERE was no shortage of brave (or foolish) competitors in the Nimbin MardiGrass “Hemp Olympix” on Saturday.

Moonshine Ochre a shade of Blues

ON STAGE: Gold Coast band Mescalito Blues.

GOLD Coast band Mescalito Blues are a regular fixture

Never weary of Bingham’s music and his crazy heart

George Ryan Bingham is an Americana singer-songwriter currently based in Los Angeles, California.

RYAN Bingham became a global sensation in 2010

Councils back campaign against ‘obscene’ Wicked slogans

Byron Shire Council has joined the fight against Wicked camper van slogans.

BALLINA, Byron councils will write to NSW and Queensland premiers

Shakespeare at Byron just As You Like It

Rosalie Craig in As You Like It, produced by the UK's National Theatre Live.

SHAKESPEARE’S glorious comedy of love and change comes to Byron

Ramones drummer to hit the beats in Byron Bay today

Richie Ramone is an American drummer best known for being the drummer for the iconic punk band the Ramones, from February 1983 until August 1987.

HE WAS born Richard Reinhardt in 1957

British family bashed in Thailand

Family beaten and kicked unconscious by gang in Thailand.

Family beaten and kicked unconscious by gang in Thailand.

Ben Hunt wary of Sharks Halfback

Ben Hunt of the Broncos looks to pass during the round 23 NRL match between the Brisbane Broncos and the St George Illawarra Dragons at Suncorp Stadium.

Ben Hunt talks about Cronulla's Chad Townsend.

Broncos prepare for Sharks

Defensive training session at the Broncos

Tough defensive session in preparation for Sharks game.

How a sacked real estate agent made $725k in four months

Agent is now under investigation by the industry watchdog

VIDEO: Art Deco fan pays $835,000 for Imperial Hotel

No Caption

Iconic "Impy" sold at a bargan price to bidder who loves Art Deco.

RBA warns of future apartment oversupply

Toowoomba: Crest Apartments and Burke & Wills, Ruthven Street ( view from Neil Street) Photo Bev Lacey / The Chronicle

RBA says oversupply of apartments poses risk to household finances