“An alarming number of retirees who take out a reverse mortgage do not fully understand how the product works until the equity in their home has already started eroding” reported The Australian recently.
The National Information Centre on Retirement Investments (NICRI) – a government-funded agency providing information to consumers – says a very common complaint is that people did not realise what would happen to the equity in their home.
NICRI says a lot of people want to get out of reverse mortgages – while the idea is fabulous at the start, they get into them and they start to panic. NICRI head Wendy Schilg says she came across one case in which a 69-year-old woman was offered $80,000 by the lender even though she needed only $40,000.
“She agreed to take the higher amount and gave her four adult children $10,000 each as a gift…not understanding the compounding interest and erosion of equity in the home. When she decided she wanted to move, she looked into paying out the reverse mortgage but found that there was not enough equity left in the home to enable her to buy elsewhere.”
David Lalich, financial services analyst at finance comparison website InfoChoice, says there are costs involved in breaking a reverse mortgage contract in the first few years from commencement and
“Borrowers may be charged an early termination fee, which could be as high as 1 per cent of the loan amount along with a discharge fee of up to $500.”
NICRI believes lenders are not giving borrowers the worst-case scenarios when explaining how reverse mortgages work and is calling on the government to provide funding for a dedicated equity release information centre.
In its proposal to Minister for Financial Services Chris Bowen NICRI says
“If consumers do not understand the product fully, there is a real danger that homes may be lost, older people will not be able to access reasonable aged-care accommodation, families will be torn apart. Once excess equity is depleted, families may be forced to cover living costs of their elderly parents, causing intergenerational financial stress.”
NICRI is calling for financial and legal advice to be made compulsory for reverse mortgage borrowers.
However, SEQUAL warns against heavy-handed regulation.
“Equity release is likely to emerge as a significant part of retirement funding and the current debate around advice and regulatory intervention needs to be carefully considered against that growing demand to ensure choices and legitimate strategies in retirement funding are not extinguished through . . . unnecessary regulation.”
In terms of how borrowers are using the money, NICRI does not have any concerns, saying most are appropriately putting it towards home maintenance and car repairs. Wendy Schilg says
“A lot of people are using it to prop up their pension – that extra $100 a fortnight they get from their reverse mortgage is actually allowing them to . . . have a social life.”
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