(Whittaker Macnaught eBulletin)
A reverse mortgage is a special type of loan used to convert the equity in a home into cash. The money obtained through a reverse mortgage is usually used to provide seniors with financial security in their retirement years. In 2006, Australians used reverse mortgages to borrow $560 million, which is an increase of 80 percent over the $310 million borrowed in 2005. The fastest growing segment was the 60-69 age group, although the largest group of borrowers was those in their 70s. With 27,000 households opting for a reverse mortgage, the average loan came in at $54,200.
Lending is based on the age of the borrowers and the value of the property, and ranges from between 10 and 15 percent of equity for those aged over 60, and up to 40 percent for people over 80. New South Wales had the lion’s share of the market with 41 percent of reverse mortgages, followed by Queensland and Victoria at 20 percent each.
For an overwhelming majority of Australians, their principal residence is also their single largest investment. It’s important to realise that borrowing against this asset carries its own risks, and because reverse mortgages are designed for people in retirement, the opportunity to recover if an investment goes sour is extremely limited. Taking out a reverse mortgage to help your children’s business investment because they can’t get a loan is a recipe for disaster.