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
12st Jun 2008
Reverse Mortgage ˇV interest rate and fees effects
When seniors are comparing various reverse mortgage products from a variety of lenders, their decision on which lender to use is often based on interest rate alone. This is important but so too can be upfront costs and monthly fees and the end loan amount can be significantly different. There are a number of calculatorsˇ¦ available that aid the decision process. See Links on our website to access the ASIC, PLAN Australia or MFAA specific Reverse Mortgage calculators.
These reverse mortgage calculators all return very similar results. They have capacity to enter upfront costs, monthly fees, various interest rates, monthly draw-down amounts and have pre-set property market growth rates with the ability to set your own. What they do not yet do is give you the ability to enter lump sum draw down amounts at specific times where you have established a cash reserve facility, i.e. draw down $5,000 next year, another $12,000 in three years time etc. Nor do they give you an ability to factor in additional annual type costs, such as valuation fees every three years by some lenders. They are however far more sophisticated than previous versions. All require some base understanding of the amount you can borrow or the percentage you can borrow based on age of youngest occupant/owner.
Using the ASIC calculator, the screen shot below shows the base format.
The benefit to seniors is that they can now more easily compare different reverse mortgage products from various lenders. You can see the difference between taking a reverse mortgage at 9.8% per annum to that from another lender who charges 10.47%. Taking an average value type loan of $50,000, the effect in 10 years on the amount owed is $9k, in 20 years it is $50k and in 30 years the difference is $106k. That presumes the interest rate differential remains the same for those time frames. In the screen shots below, I have set Monthly Fees and Establishment costs to $0. The results are shown below.
If we use the same interest rate but one lender has Establishment Fees of $300 and no Monthly Fees and compare that to another lender with the same interest rate but $1,000 Establishment Fees and $10 per Month administration Fee, the differences are significant over time.
By year 10, there is a difference of $4k, by year 20 $12k and by year 30 the difference increases to $40k. Due to the nature of compounding interest, any additional fees and charges result in significantly higher costs. Why pay more?
Give me a call to find out whether this type of product could work for you and what you could borrow based on your age and value of your property. We take the approach of looking at your long term goals and working to find a solution through finance for you. This appointment is no-cost and is obligation free, call ˇV 9397 7275