At the conclusion of World War II in 1945, and after a disruption of some six years, thousands of Australian men and women returned home from duty, to family and loved ones, to pick up their lives where they left off. Within a year the population explosion that we call the Baby Boomers generation was in full swing.
From 1946 until 1961 the nation's birth rate soared, and over four million new Australians were born. This number also increased as a result of an upsurge in migration to Australia from Europe, with thousands seeking the promise of a new and better life on the other side of the world.
As we approach the end of 2006, we will enter an era when the first of the "Baby Boomers" generation will be turning sixty years of age. It is estimated that between 2006 and 2016 there will be three million Australians reach the minimum retirement age, the impact of this both socially and economically will be immense.
I am not going to go into detail on the global ramifications of this significant event, what I am concerned, about and feel important is, what this will mean to the people who will be looking at retirement themselves over the next few years.
It is a sad fact that less than 5% of the population have adequate money put aside to be able to enjoy retirement with the same lifestyle they have become accustomed to, when working full time. The same is true for all the "First World" nations of the world - Australia, The United States, Canada, Japan, and most of the countries of Western Europe.
In this country, many people are confident they will be able rely on the aged pension to help sustain an adequate retirement lifestyle. I often hear things like "my cost of living will be less when I retire". In many instances, this is true, though I think anyone would agree that things like medicine and healthcare will only increase as we get older, and perhaps by enough to absorb any savings in other areas.
The maximum amount for the "Aged Pension" at the time of writing is $512.10 per fortnight ($13,314.60 p/a) for an individual and $427.70 each - per fortnight ($11,120.20 each p/a) for a couple. This number is also affected by the value of any assets held (ie. shares, superannuation, savings, property - not including the family home) and any regular income received, things like superannuation payments or rent from a granny flat for instance. (For more information see http://www.centrelink.gov.au)
When the aged pension benefit is compared with the minimum wage (approximately $30,000 per year), it is not hard to imagine that the governments plan for our retirement is not particularly rosy.
What's the answer? We can invest more into our superannuation scheme to make certain we have resources enough to not have to worry about the aged pension. For many Baby Boomers it is much too late in the day for this to be a solution.
Perhaps property investment? This is an investment that is both tax effective and relatively safe thus it is favoured by many people. The price of residential Real Estate on average over the past 60 years has risen by 10.2% per annum, this means residential property doubles about every seven years (check out the numbers on your own home, how much did it cost, and what is it worth today?). Once again, though, this seven year cycle of doubling your money may just be too long to wait.
There is an upside to this gloomy scenario. A high percentage of people approaching retirement own their homes outright. The family home is (in a great many cases) the largest asset we will ever have.
The trouble is that we cannot eat it! So one alternative is to sell up and move to a more modest dwelling and "Cash In" on the change over. This scenario is not popular in this country, most of us are house proud and really don't want to move to an unfamiliar area, late in life, and away from family and friends.
This is where a Reverse Mortgage can help.
A "Reverse Mortgage" or "Equity Release Loan" is a loan that converts the equity in a home into cash. This can be either in a lump sum or as a regular monthly income over ten years. You can also elect to have a combination of both. A Reverse Mortgage is similar to any other mortgage in so far as it is a loan secured by property. It's most unique aspect, however, is that no repayments are required until the home is sold.
These loans are designed for retirees or pre retirees over 60 years of age who have invested most of their income into their home and have less cash than they would like in retirement to enjoy life.
A Reverse Mortgage is restricted to a maximum loan to value ratio (L.V.R.) of about 40% of the value of the property securing the loan. For instance a home valued at $400,000 would have a maximum reverse mortgage amount of $160,000.
These types of loans are also restricted by the age of the youngest borrower, for example, if the age of the youngest borrower is 65 years, the maximum LVR (Loan to Value Ratio) is 20%, if the age of the youngest borrower is 70 years, the maximum LVR (Loan to Value Ratio) increases to 25%, and so on until the maximum available LVR is reached - 40% at age 85.
Loan interest and any fees and charges are added to the loan balance - this is called capitalising the costs - and repayment of the loan is only required when one of the following happens:
1. The borrowers decide to move out of the house
2. The borrowers both die (if one borrow lives on, they can still remain in the home until death or until they decide to move on.
3. The home is sold.
The total amount owed at the end of the day is equal to any funds received, plus accrued interest, and any fees and charges - minus any repayments paid.
Most people's major concern about this type of mortgage comes from the fear of their lender being able to take the home away from you whenever they want. This is not the case. The property cannot be taken away even if the value of the loan eventually exceeds the market value of the property - even if you live to be 150 (and I hope you do). This safety feature is called a "no negative equity guarantee" or "no recourse guarantee".
The best lenders for this type of loan belong to an organisation called SEQUAL (http://www.sequal.com.au), this stands for Senior Australians Equity Release Association of Lenders. Members of SEQUAL abide by a strict code of conduct, which in summary states:
1. Treat all Borrowers with respect and dignity
2. Ensure that all products carry a clear 'no negative equity' or 'non-recourse' guarantee. (Borrowers will never owe more than the value of their property)
3. Encourage Borrowers to:
a. Discuss the transaction with family members
b. Seek independent financial advice from a qualified financial adviser
c. Discuss the transaction with Centrelink to ensure they fully understand the impact, if any, on their Centrelink entitlements
4. Ensure that the Borrowers obtain independent legal advice by the solicitor of their choice.
5. Clearly and accurately identify all costs to the Borrowers that are associated with the transaction.
One of the other big concerns I have come across with people who are in a position to greatly benefit from a reverse mortgage is, that many retirees feel guilty that they are "spending their children's inheritance". This is understandable, though I think very few of us would begrudge a more pleasurable retirement to our parents just to make sure we get a larger slice of the inheritance pie when they eventually shed this mortal coil.
In fact this situation is rarely the case. The best way to demonstrate this (as usual) with an example.
Let's assume we have a retired couple, June & Kevin, they are both aged 70 years and have found that their superannuation nest egg has not lasted as long as they hoped. They own their home outright, and its current value is $500,000. After talking things over with the family, they decide to release some equity from their home with a reverse mortgage, in the form of a lump sum. They want to by a four wheel drive and a caravan to tour Australia before they get too old. They will need about $70,000 to buy the car and caravan of their choice and would like to have a little extra to travel with, they need about $90,000.
The graph below shows the value of their home as compared to the outstanding balance of their loan. They do not intend to make any repayments and the annual growth in value of their home is estimated at a very conservative 5%. They have also elected to fix their interest rate for 10 years.
