26 Giffard Street
Williamstown 3016
Ph. 03 9397 7275
Fax. 03 9397 1734
Mobile. 0428 310 165
Email. reidcont@tpg.com.au
ABN: 65 111 801 079
www.reidconsultants.com.au

As part of the process I go through with clients, I look at options or alternatives they may have or not yet explored rather than taking a reverse mortgage. In simple terms a reverse mortgage is a loan of money from a lender with no fixed repayment date. There is no requirement to pay interest or principal so the loan builds over time. Depending on the interest rate and the structure of the borrowing, it may double every ten years. If people have an alternative, it needs to be compared to the cost of this type of loan.

Other assets always need to be considered, can they be converted into cash or sold? That in itself may raise further issues like Capital Gains Tax and its implications. With the changes to superannuation, is it possible and practical to access part of those funds to assist your current needs? For many folk, pension implications need to be considered, if exempt assets are sold, will there be issues under the assets or income tests for your pension entitlement? Perhaps it is possible to borrow money from family or even friends although most would not consider this as a viable option.

For many seniors whose wealth is almost solely the residential home, the main alternative is the sale of that home. This is a big decision in itself and it needs careful thought. Some of the issues to consider are:

• The ability to downsize in the same neighbourhood may not be an option, depending on the value of the house and the available apartments, flats or units in that neighbourhood. You may need to move out of your neighbourhood.
• There are considerable costs involved that are 'lost' costs. There are selling agent fees, 2 to 3%, advertising and marketing costs, cleaning and removal costs and then there are the purchasing costs. These include stamp duty, search fees and time, conveyancing or legal fees to settle and the sometimes difficulty in matching timing between selling and settling to purchasing and moving in. Short term rental may have to be accounted for.
• If your property is in demand, then a quick sale may result but if it is a slow market, you face inspections over weeks or even months.
• If you are not able to remain in the same neighbourhood, then consideration of the dislocation from the community is important. Can you travel back to friends and family easily, will they travel to you?

There are good reasons to sell and move to another location, such as a sea change or tree change or move to a smaller property where maintenance and upkeep is no longer a chore. These are valid reasons in themselves and not driven solely by the financial aspect. It is important not to confuse the two issues, they are different issues and need to be considered separately.

From a financial aspect, I have done some modelling to compare the effects of staying in the home by taking a reverse mortgage and comparing that with selling, downsizing and investing the difference. There are a lot of variables so I have used a simple example which ignores personal income tax issues and pension considerations.

The results depend greatly on the assumptions used. For this example the 'lost' costs are considerable, $20,810 in change-over of properties as a minimum. I have used a draw down from the Investments to be the same as that for a Reverse Mortgage income stream and any surplus is re-invested. Often the higher end of the property market performs better than the lower end, especially when moving down from a house to a flat or apartment.

There are significant variations to this and I do not want to suggest that a reverse mortgage is always the best solution for you. It depends on how much you are investing, what return you get, do you take the full amount or do you reinvest any surplus, what are the personal income tax implications and are there any pension entitlement issues? One thing that is clear, there are considerable ‘lost’ costs in selling and buying again. The changes to the superannuation laws may benefit you if you are still under 65 or under 75 and still working at least part time. If not, then the annuity path is more complex or private investment perhaps more risky.

An annuity is structured so that the capital is extinguished in your lifetime, so you are drawing down both capital and interest. Remaining in the first home, especially if it is an area which experiences higher growth due to demand than other suburbs, increases in capital value over time.

Other options to consider include:

• Selling the home to family, particularly children who may be the beneficiaries after your death anyway. They purchase the property now for an agreed price and grant you a living benefit. You need to consider the implications on your estate and other possible beneficiaries and you need to make sure you obtain legal advice and a tight agreement so that you do retain the living benefit for the remainder of your natural life.
• Obtaining money from your family, perhaps in the form of a loan. The issue often is that your children in their own life cycle are struggling as they are raising a family or paying off their own mortgage.
• If they cannot afford to loan you a lump sum and they are concerned with the compounding interest, perhaps they can afford to pay the annual interest charge each year so the loan remains at the original borrowed amount which can be settled at the a later point in time or during the estate period.

Give me a call to investigate the possible implications of these choices and see what works for you and where applicable, for your family. We take the approach of looking at your long term goals and working to find a solution through finance for you. This appointment is at no-cost and is obligation free, call – 03 9397 7275

Helping People through Finance