Unlock Home Equity

Newcastle Herald

Monday September 23, 2002

noel whittaker

EVEN though the property boom has caused people's wealth to soar, the downside is that older home owners now find themselves with more assets but no extra cash.

To make matters worse, the increased property valuations have made their rates rise even though their income hasn't. The position is exacerbated when one partner dies and their aged pension drops or they are faced with a bill for $18,000 for a hip replacement.

Moving to a smaller house to release capital is an option, but many wish to continue to live in the family home. In any event, the rise in life expectancy coupled withbetter health care mean people now live longer in their own homes.

In short, an increasing number of older people are finding themselves in good health but with all their money tied up in a valuable home they don't want to leave.

The challenge for them is to unlock the equity in that home. One solution is to mortgage their home and leave the interest to accrue, but it is hard to find a lender prepared to take on this type of deal.

The Advance Bank once offered a loan that did not require interest to be paid during the borrower's lifetime. The loan plus accrued interest was paid out of the estate.

The minimum loan was $20,000, while the maximum was set at 20% of the valuation of the home. For example, if a 75-year-old couple had a home worth $180,000, the maximum loan was $36,000.

The disadvantage with these loans is that they grow faster and faster as the interest is added to the debt. If the rate is 7%, a $36,000 debt will grow to $72,000 in 10 years and $144,000 in another 10.

This may not bother the borrowers as they will be 95 years old then and the value of their home is bound to have increased. However, it may bother their beneficiaries who may prefer to help by providing money from their own resources.

In the merger with St George, the Advance Bank loans were discontinued, possibly because of the era of consumerism that is sweeping the country.

A bank may well be scared of being asked to appear on a nightly current affairs program to explain why they allowed a 95-year-old couple's debt to quadruple, particularly if the couple are at a stage where they are prepared to claim that they had no idea their debt was going up.

Another option is to seek assistance under the pension loan scheme offered by Centrelink. It's far too complicated to explain here and intending applicants should call the Centrelink financial information service on 13 23 00.

However, the following is asimple example:

The Browns are receiving a part pension and wish to supplement their income. They offer a mortgage over their house and become entitled to a loan of $20,000 which will be paid to them at the rate of $348 a fortnight. Interest at the current of 5.25% will be capitalised.

When they sell their home, either because they are moving to a retirement village or because of death, the debt will be repaid from sale of the house. Of course if there is a windfall, the loan moneys can be paid off early rather than waiting until a move or death.

A similar option is called a `reverse mortgage' whereby a mortgage is placed on the family home and the owners draw down a regular income from it. The schemes operate in New Zealand where the most that can be drawn is 20% of the value of the home.

The debt grows by a combination of interest and drawings but can be increased if the property value increases and a higher debt can be accommodated without exceeding 20% of the new valuation.

Nobody in Australia has offered reverse mortgages yet, but actuary David Orford of Financial Synergy has put forward suggestions as to how they could work.

He points out that a house consists of two components: a `life interest' giving a person the right to live in it until death, and a `reversionary interest' which is the right to obtain ownership of the property on the death of the person with the life interest.

Under the Orford proposal, the home owner could sell a portion of the reversionary interest to a life company in exchange for a lump sum. The life company would recoup its money, plus interest or profit when the house was eventually sold.

This is obviously a subject which will grow in importance as the baby boomers age. However, no matter how you approach it, you end up in a situation where the family home is being saddled with a rising debt.

This will mean a smaller estate for the beneficiaries and in many cases it may be simpler and cheaper if the beneficiaries themselves take out a loan to provide some capital for their parents.

If the loan was written on an interest-only basis, the cost of a $20,000 loan would be only $1400 a year, a relatively small sum if shared by a few and certainly better than depleting the estate. Noel Whittaker is a proper authority holder for Whittaker Macnaught Pty Ltd ? licensed dealer in securities.

© 2002 Newcastle Herald

Back to News Index | Back to Home