Nicholas Taylor No Comments

Loan Scenario of the Week

Ms William (63) owns a 2 bedroom apartment in Canberra worth over $600,000. She is a trained and certified accountant. She was retrenched in a corporate restructure, and due to her age she struggled to get other work. Due to her age she was not eligible to receive an old age pension. She has very little super as she spent most of her adult life working in the home raising her children.

Ms Williams was left to survive on the Job Seeker payments, but this was not enough for her to even pay her rates and body corporate fees and she was not living comfortably. She took out a reverse mortgage on her apartment with a regular payment of $1,000.00 a month or $60,000 over 5 years.

The relatively small amount drawn per month means the interest charged is kept to a minimum. According to the ASIC reverse Mortgage calculator after 5 years the likely amount owed at current interest rates (5.09%) will only be $69,445. But the property will have increased in value from $600,000 to $695,000 (3.0%p.a  property growth)

Once she is eligible for the aged pension we will work with her to reassess her situation to see if she needs to continue to access her equity monthly, or whether she can stop her regular payments and only access funds on ad hoc basis as necessary. This will incur a saving for Ms William as she only pays interest on the loan for money she has drawn down.

This loan facility has provided the Ms Williams with a new leash on life and she can, now look for another job or even enjoy an earlier than expected retirement without the financial hardships she was struggling with.

(Names and Suburbs have been changed to protect the identity of our clients.)

Nicholas Taylor No Comments

Gifting without losing Super investment returns – Loan Scenario of the Week

Mr & Mrs Jones (71 &72) own a house on Sydney’s Northern Beaches worth $5 Million as well as a holiday house on the North Coast worth $2.5 Million, both with no mortgages, as well as $5 Million in Superannuation. They still own and run their highly successful business.

Their eldest son is currently looking to purchase a house in Sydney’s North Shore. To help him with this, they have decided to gift $500,000.00 towards this purchase. To do this, the clients have decided to enter into a Reverse Mortgage on their property in the Northern Beaches for this amount, and access part of his inheritance before his parents have died. They want to be able to see their son enjoy their financial legacy.

This money could have been taken out of their Superannuation, however, leaving it in their Super Fund will provide them a far greater return on investment than the interest on a Reverse Mortgage will cost. Due to their strong financial position, they do not receive a pension. Therefore, the gifting of this money will not affect any social security they receive. As the Reverse Mortgage allows repayment, they intend to pay off the Reverse Mortgage within the next 5 years with the income generated from their Superannuation and family business.

They intend to repeat this process again for their younger son when he is able to purchase a property.

(Names and Suburbs have been changed to protect the identity of our clients.)

senior man happy with cash reserve
BR 1 Comment

Why should I consider a “Cash reserve” in my Reverse Mortgage loan?

A Cash Reserve is simply funds in the reverse mortgage loan that are greater than your immediate needs. These funds remain in the loan and do not incur any fees or charges (including no interest charge) until you actually draw the funds down.

When considering borrowing funds via a reverse mortgage loan, it is important to consider your current needs, your intermediate needs, and your longer term or ‘Later Life’ needs.

IMMEDIATE NEEDS

For most people, there is usually a ‘trigger’ that leads to considering a reverse mortgage loan. Often, the trigger is to repay a mortgage loan or credit card debt, but other immediate needs include Home Improvements; Upgrade of the Car; Travel or to assist a family member.

INTERMEDIATE NEEDS

Many of our clients report difficulty in managing today’s costs of living whilst on pension or other ‘fixed’ incomes. One of the primary considerations here is to set up a regular monthly transfer of funds from the loan to the client’s bank account, to supplement their pension income. This is often between $500 – $1,000 a month and can have a dramatic effect on being able to manage the day-to-day costs of living!

Many clients use the regular monthly transfer to pay their medical benefits premiums, ensuring they have the maximum protection against illness as they grow older.

Other Intermediate needs include a future (planned) replacement of the car; home improvements; assistance for a family member; travel and/or holidays.

Longer Term or ‘Later Life’ needs.

A phrase I often use in discussions with clients is “As we grow older, we don’t know what the future may bring, but we can be pretty sure whatever it is will cost money!”

The older we get, the more likely we will need some medical assistance, including possible hospital treatments etc. Even when we have medical benefit membership, there are often significant ‘gap payments’ required. The Cash Reserve can assist with such costs.

Another consideration is when one partner of a couple needs in home aged care assistance or needs to be admitted to an Aged Care Nursing Home. The Cash Reserve can assist with such costs.

And perhaps the most important consideration is when a partner of a couple dies. The joint (couple) rate of pension is currently $744.40 each a fortnight. The single rate of pension is $987.40 a fortnight. If your partner passes away, your household income will reduce from $1,488.80 a fortnight to $987.60 a fortnight. That is a reduction of 33.66%!

Your living costs will not be reduced by anywhere like that amount – That is where a Cash Reserve is a vital component to ensure you can remain living comfortably in your home.

The reverse mortgage loan is in place until the last borrower ceases to live in the property.

Discussing all your needs (immediate, intermediate and ‘Later Life’) with your RMFS advisor at the time of setting up your loan can mean the difference in being able to remain living comfortably in your home for as long as you choose to!

Peter Bolitho