Unwinding a reverse mortgage can be difficult

Hi Nicole, My wife and I need some help as to what we can do to stop our reverse mortgage from growing out of hand, so that it does not eat into the value of the estate that we wish to leave to our two children. We took it out a few years ago to make some purchases and now we are worried that it is growing too much and would like to know what we can do to stop this. Our home is worth about $500,000, the reverse mortgage has increased to $130,000 and we are paying 5.98 per cent interest – this is through Bankwest and seems to be nearly double the current home mortgage rate. We are both on the age pension with no other income – I am 76 and my wife is 72. Trevor

Trevor, reverse mortgage interest rates are always higher than the regular, vanilla variety because they are very different beasts – there are no periodic payments on a reverse mortgage and a lender does not know when its money will ultimately be paid back (or how much of it).

The big potential disadvantage from any reverse mortgage is compounding interest rates could take a big bite from the estate when the borrower dies and the outstanding loan is repaid.Credit:Simon Letch

You have sold an as-yet undetermined slice of your home to Bankwest in return for a lump sum (a regular income is sometimes possible, too), agreeing to repay this money on your death, or its sale or possibly refinance.

The size of this slice can grow quickly, as the interest is compounded: rolled up month after month.

Even so, it is a legitimate money move for asset-rich but cash poor retirees.

Now for your options:

Making repayments – If you can manage this and it is allowed, you could at least make interest repayments to keep the debt under control.

Refinancing at a lower interest rate – However, this may be difficult as not many lenders offer reverse mortgages and other loan options would require loan repayments.

Lending criteria has also tightened and it is harder for people who do not have strong income to get approval. Getting your children to go guarantor might, however, get you over the line.

Selling (in part or full) to the kids – Louise Biti, director of Aged Care Steps, says your children could buy you out, with an agreement that allows you to continue living in the home.

However, Biti says important considerations include:

Centrelink impacts – If you sell only part of the home, you would still be assessed as a homeowner but, if you sell it all, you would be assessed as a non-homeowner. In either case, any sale proceeds you receive would be assessable in your age pension means test and may impact your pension.

If you sell for less than the market value of the portion sold, Centrelink may assess the shortfall as a gift and apply deprivation rules, which mean all but up to $10,000 of the gift would count in your pension means testing for the next five years.

Tax implications – Stamp duty would be payable on the amount of the home sold and the kids may also start to accumulate and be liable for land tax and capital gains tax.

Biti says that another option is a granny flat. If you are selling all of the house to the kids for less than market value, such an arrangement could minimise the impact on your age pension.

“A granny flat arrangement sees you continue to be assessed as a homeowner and may minimise or avoid gifting/deprivation from being applied,” she explains.

Two of the most important considerations, if you transfer ownership, is the impact if the arrangement with family breaks down or you need to access aged care.

If you need aged care and do not own a home, you may be able to access care at concessional rates, but you may lose choices and have less control over the quality of lifestyle.

Just remember that, even if you do nothing, at least property price growth has resumed in most areas. So as the debt on your house is growing, so too is its value.

Nicole Pedersen-McKinnon is the author of How to get mortgage-free like me. Send her a question at [email protected], or follow her on Facebook, Twitter or Instagram.

Source: Read Full Article