One of the best ways to educate older Australians about Reverse Mortgages is to provide examples of releasing equity in the most efficient way. For many seniors the primary purpose of Equity Release is repairs and maintenance to the family home.
Retirement income is often insufficient to pay for costly repairs and accessing equity to maintain the home has two purposes. It ensures the value of the family home is not diminished due to disrepair. Additionally, appropriate repairs such as flooring and electrical work provide greater safety for the occupants.
The secondary purpose for Reverse Mortgages is additional income in retirement. We all understand that the monies earned whilst in employment are never achieved in retirement and adjustments have to be made. But for many retirees the gap is far greater than we would seek, and having regular additional monies would make an enormous difference to the quality of their lives.
What is the best method to access equity?
Whilst there is no requirement for regular repayments, it is important to understand that interest is applied to the loan account each month, and this means interest is applied upon interest. It is similar to capital growth when property may increase, for example, 4% per year. The growth is not on the purchase price of 20-30 years ago, but on the previous year’s value.
The best method to view the cost of borrowing Equity Release is to establish what is required over a budgeted period, say 10 years, and then compare two methods of accessing funds.
Let’s say a couple aged 74 and 72 own their home valued at $600,000 and would like to access $125,000, based on $25,000 upfront for repairs and maintenance and $10,000 per annum over 10 years.
We need to forecast two key elements. The first is capital growth and for a home valued at $600,000, the long term growth would be approximately 4% per annum. The second is the interest rate and here we estimate a long term average rate of 9%, as compared to today’s rate of 6.25%.
The clients have two options
- take $125,000 as a lump sum or
- take $25,000 initially and then draw down $833 per month for 10 years
The result of taking $125,000 as a lump sum is seen as follows
| Year | Mortgage | Equity | Total |
| 0 | 125,000 | 475,000 | 600,000 |
| 5 | 196,000 | 534,000 | 730,000 |
| 10 | 306,000 | 582,000 | 888,000 |
| 15 | 480,000 | 601,000 | 1,081,000 |
The result of taking $25,000 initially and then a permanent monthly draw down is as follows
| Year | Mortgage | Equity | Total |
| 0 | 25,000 | 575,000 | 600,000 |
| 5 | 102,000 | 628,000 | 730,000 |
| 10 | 224,000 | 664,000 | 888,000 |
| 15 | 350,000 | 730,000 | 1,081,000 |
Based on a lump sum, in 10 years time there is $18,000 less equity in the home as compared to today’s value. But with a smaller lump sum and regular draw down, there is projected to be $64,000 more equity than today’s value. In both examples there is one important point. There is still considerable equity remaining for aged care if it is required, and still a significant estate for future beneficiaries.
For a carefully planned assessment of your needs, please contact your local Reverse Mortgages Finance Solutions expert. www.reversemortgagefinancesolutions.com.au