Age-old Remedy

Newcastle Herald

Monday December 23, 2002

Noel Whittaker

CHRISTMAS has come early for retirees with the introduction of a unique reverse mortgage product from St George Bank.

It is a revamp of the old Advance seniors loan that disappeared when St George took over Advance and has been released because of the growing demand from retirees who find themselves asset rich and cash poor.

In many cases the value of their home has shot up during the recent property boom but the increased net worth is little consolation when their budget is mauled by rising council rates.

Unfortunately our aged pension system doesn't help, as it is full of anomalies. For example, a wealthy retired couple earning $35,000 a year can qualify for a pension of almost $7000 a year, giving them a total income of $42,000 a year tax free.

A single pensioner with few assets apart from their home is forced to try to eke out a living on the maximum single aged pension of $11,315 a year. For them a holiday is a luxury, and major repairs to the house a nightmare.

The problem with any reverse mortgage is that the borrower does not make any repayments. Therefore, the interest is added to the debt so that it grows faster and faster as time passes. Fortunately as current interest rates are around 7%, and there is no sign they will increase, it would take 10 years for the debt to double.

The bank has anticipated this by restricting loans for customers aged between 65 and 69 to a maximum of $80,000 or 15% of the valuation of the property, whichever is the lower. Customers aged 70 or over can borrow a maximum of $100,000 or 20% of the valuation of the property.

A feature of the loan is that there is no claim in the estate if the debt grows to a level where it exceeds the value of the house. The bank will pick up any shortfall if the sale proceeds are insufficient to cover the debt.

The loan will appeal to anybody who is more concerned with enjoying their money while they are alive than giving it to their children.

However, borrowers and their family should clearly understand that part of the estate is being mortgaged to provide cash today. If the children were well off they may find a better strategy is to pay the interest payments on the parents' behalf so the debt does not go up.

On a $30,000 loan this would be only $2000 a year. The bank is happy to cooperate and there is no penalty if the borrowers or their family wish to reduce the loan or just pay the interest.

The other new loan product issued recently is from Wizard Home Loans and is targeted to the other end of the market ? families who wish to have babies.

Appropriately named `pregnant pause', it allows borrowers to put their loan repayments on hold for up to three months if the woman falls pregnant, and to restructure their loan repayments if the expense of the new-born baby necessitates this.

Wizard Home Loans is taking a commonsense approach in restricting the loan repayment holiday period to just three months, as capitalising interest for much longer could create a debt that could be extremely costly in the long term.

Westpac offers a somewhat similar facility whereby borrowers can reduce their repayments by up to 50% while they are on maternity leave.

Of course, borrowers who use my $12 a 1000 rule will handle it effortlessly. If a couple had a $150,000 mortgage and could pay it back at $1800 a month the term would be 9.26 years if the interest rate was 6.5%.

If the payments were suspended for three months and the interest for that period capitalised the term would increase to 9.73 years. This is another illustration of compounding at work ? pay your loan back quickly and you gain much more flexibility as well as saving a fortune in interest. Noel Whittaker is a proper authority holder for Whittaker Macnaught Pty Ltd ? licensed dealer in securities.

© 2002 Newcastle Herald

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