Coming Soon, A Mortgage With No Interest Payments

Sun Herald

Sunday October 29, 2006

David Potts

Some banks are planning loans in return for only part of your house sale, David Potts writes.

THE NEW must-have financial accessory is a reverse mortgage because you get the cash, don't pay tax on it, and never have to make another repayment.

I'll have one of those, thank you very much.

Whoops, you have to be over 60. And have paid off the other mortgage.

But wait, there's an even better one coming. With this you get the cash, don't pay tax on it, never have to make another repayment, and don't even have to pay interest.

And you can be either side of 60, too.

Whatever will they think of next?

Well, perhaps not quite what you're thinking, since a reverse mortgage sounds as if it should be the opposite of a loan, like the bank owing you money.

In fact it's a normal mortgage, only the lender capitalises the interest so you don't make any repayments. When you sell your home, the bank takes back its money plus the interest you didn't pay.

No wonder retirees are flocking to them.

There are already 16 lenders, including some banks, and the amount lent has doubled in 18 months to $1.1 billion as at June 30. Drawdowns are growing at an annualised rate of 50 per cent, actuaries Trowbridge Deloitte say.

So long as you don't take more than $40,000 in one bite or buy an assessable asset such as a car, the money is pension test-free.

And there's no tax because all you're doing is cashing in the tax-free equity of your home.

Most reverse mortgage lenders will let you take an income stream instead, also tax- and pension test-free. How much they will lend depends on your age, since reverse mortgages are cashed in only when you have to move into a retirement home or, ahem, go to the great bank in the sky. The older you are, the more they'll lend because, um, they're going to get it back sooner.

There are big differences in the interest rates between lenders - usually about 1 per cent higher than a normal home loan - and conditions.

But they all insist you have paid off your old mortgage first. Some even help pay it off if you only have a bit to go.

This is not without irony. Having spent years paying off the home loan, it's hard to imagine anybody in their 60s or 70s would willingly go back into debt again. Unless, that is, they don't have a choice.

"They meet a need for people in the latter years of retirement who don't have enough to live on," says Louise Biti, head of technical services at Asteron financial advisory group.

"They're expensive because of the compounding interest so I don't advocate them for investments while there are other funds you can use," Biti says. "It's only for when everything else runs out."

Apart from compounding interest, which means at an 8 per cent rate whatever you borrowed will have doubled in nine years, you're also squeezed if house prices fall.

And since rising rates and falling real-estate prices go together, that's some pincer movement reducing your equity.

Mind you, you can fix your rate. Bluestone even offers a fixed rate for life, which is about 8.5 per cent. There's a capped rate as well where the interest drops if rates fall, but can't go above 9.89 per cent.

At least it's impossible to finish up with negative equity, thanks to the stringent rules of the industry body, Senior Australians Equity Release Association of Lenders, which somehow becomes SEQUAL.

It does mean, however, that you or your estate could owe the entire value of the home. That won't make you popular with the kids.

Especially when the alternatives are selling the home and downsizing or, for that matter, getting a loan from the kids. Certainly a reverse mortgage is seen as a last resort by advisers.

But that could be about to change.

The next stage from reverse is a reversion mortgage. This is a sort of reverse loan in reverse, since you avoid paying interest because there isn't any.

Instead your lender takes a share in any capital gains your property makes.

Bendigo Bank's Homesafe Debt Free Equity Release will lend between $25,000 and $500,000 in return for a fixed percentage, up to a maximum of 50 per cent, of whatever you get for your home when you, um, move on.

But Greenway will be unveiling a third possibility in the new year, called an equity mortgage.

It also shares the capital gain but the twist is if prices haven't moved when you sell, you don't pay a cent more than the amount you originally borrowed. Clearly there's no capital gain to share, plus there's no interest, either.

How much you share of any capital gains with Greenway will depend on how much you borrow, but it's likely to be 20 to 30 per cent.

If the price drops, that's the lender's bad luck. You just pay back the amount you borrowed in the first place, with no interest. Not bad, eh?

"People hate the idea of going back to a mortgage with an interest rate," Greenway's head of marketing Samantha Clarke says.

"There's a profit upside and no downside."

Better still, the age 60 minimum of reverse mortgages will be abolished.

This is bound to open up all sorts of possibilities for 50- or even 40-somethings.

For one thing it'll mean you can shift your wealth between tax-free environments: the family home and super.

Unlike most reverse mortgages, you keep the title deed to your home.

"You'll be able to monetarise your home and put it into super," Clarke says.

"Or if you're buying a bigger home it'll be like an equity booster."

For example, it might mean you can retire at 45 by transferring your home equity into super taxed at concessional rates, then tax-free after 60.

"I'm going to use it to buy a bigger house without having extra repayments," Clarke says.

The trouble is that to qualify for these sorts of loans, you need to have paid off your ordinary mortgage.

That may not be such a good idea, thanks to the Government's changes to super.

"The changes make it better to put more into super and pay only the minimum off on the home loan," Matthew Esler, head of technical at Advance Asset Management, warns.

"There are alternative strategies to release income without the extra restrictions," he says. They included fully franked dividend-paying shares and tax-deductible debt such as a home equity line of credit.

"At the end of the day the reverse mortgage lender is taking a cut."

Yet strange as it sounds, reverse mortgages could be a quick way of boosting your super. By increasing your cash flow, albeit at some cost down the track, there's more you can stick into super.

Or, looked at the other way, there's less need to draw down super if you're over 55 or retired.

Another intriguing possibility is using a reverse mortgage to pay off the remains of an ordinary mortgage. Again it immediately improves your cash position, though at a cost later, which may or may not worry you.

And if a reverse mortgage all sounds like the baby boomers doing the dirty on the next generation, relax. It can also be used as a way of getting a deposit for a home loan for their children or even grandchildren.

Just think, the home of one generation could be used to house the next, and nobody has to move.

THE CASE FOR REVERSE MORTGAGES

? Way of cashing in unused equity in your home.

? Tax free.

? No Centrelink implications if less than $40,000 is drawn in one go.

? Lenders don't care what your income is. Or isn't.

? Boosts cash flow.

THE CASE AGAINST REVERSE MORTGAGES

? Expensive.

? Lot of fiddly conditions.

? Compounding interest cuts into equity.

? Prices could drop.

? The kids might not like it.

Going into debt at 72 to 'enjoy life'

CASE STUDY: ROB AND VAL HENDRY

THEY'VE never had a mortgage and hate the idea of debt so much that the only credit card they have is one of those Visa ones which you have to load up with cash before you can use it.

Which doesn't make Robert and Val Hendry, both 72, likely candidates for a reverse mortgage on their home.

"It's a case of enjoying life and getting the best out of it," said Val who got a $40,000 reverse mortgage from Resi so the couple could plan some renovations and a big trip to the UK next year to see their relatives "for the last time".

Their three middle-aged children, who all have their own mortgages, aren't worried in the slightest about losing some of their inheritance either.

For a start it was their idea.

"We're on the pension and I was trying to penny pinch and save. We're thrifty. They said spend it all," Val said, although she admitted it took them a year to come around to the idea of a reverse mortgage. After all they'd never had a mortgage and bought their house on the coast 12 years ago from Robert's retirement payout.

Besides, they figured that if they lived another 20 years, there would still be 50 per cent of the equity in their home left for the children.

"I realised you can use [the equity] and you've still got the house," she said.

"It's a case of enjoying life. I'll have a good try."