Retirees 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.”
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.
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.
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.”
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?