Nest Egg Gone Retirees ‘Saved’ By Home Reversion Scheme
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December 21, 2009Retirees Keith and Helen Cowie faced a financial crisis three years ago when their nest egg nearly petered out reports The Australian.
At 76 Keith, like many others, considered a reverse mortgage, where the equity in a home is used as security to borrow more, though he was concerned that there may not be anything left for his family. He says
“I didn’t like reverse mortgages, because I didn’t like the compounding interest factor because it didn’t hit a target amount and stay static at that period – the longer they go, the more the equity in your home is eroded.”
Home Reversion
This is a new debt free equity release scheme that allows people over 60 to sell a share of the future sale proceeds of their home. It was being offered through the Bendigo Bank by Homesafe Solutions at the time.
Unlike A Reverse Mortgage
There is no capitalising interest, so the remaining proportion of the home equity is protected and the homeowner knows the minimum share the estate will retain when the house is sold.
What The Cowies Did
The Cowies sold about 30 per cent of the future sale price of their home to Homesafe for $102,000, about 18 per cent of the house’s value at the time. Keith says
“I’d rather provide a percentage of the valuation of my home knowing that is not going to be really exceeded to any great extent, as opposed to knowing I’m in a reverse mortgage where interest is being compounded every day, every month, every year to a point where you’ve got nothing left.”
Who Would Home Reversion Suit?
These schemes would suit retirees who are not optimistic that property value increases would outperform interest rate movements.
With the equity release approach, the lender is sharing the risk in relation to house price growth, so, given the high capital value of Australian houses, and many older people being asset-rich and income-poor, releasing equity from the family home would seem to be very attractive.
The big question – which is better, a reverse mortgage or home reversion?
4 Comments
Personally I think reverse mortgages are more flexible and a home reversion seems like a dead end, no where to go afterwards.
Kevin
One person’s dead end is another’s peace of mind Kevin. The Cowies obviously had nowhere else to go, and this is the best solution for them. As to flexibility, my home loan interest rate has gone up and down like a yo-yo over the last 18 months, and I live in constant fear that my pension won’t cover the payment asked from month to month. I could handle a bit of stability.
This is very true and things change such as interest rates. When interest rates change it can have a dramatic affect on a persons finances, especially retired people. We have seen a long period of uncertainty in the economy which has got everybody worried.
Thanks Kevin, but where does that leave me now? My bank wrote to me months ago saying my monthly repayment would go up on 4 September – today I found that it actually went up on 4 August!