@luchetti_law

03 October 2006

Asset Rich - Cash Poor

One of the greatest fears for people who are nearing retirement is not having enough money to maintain a reasonable lifestyle. A reverse mortgage allows you to borrow cash against the value of your home. It is aimed specifically at this group.
Most often it is the children of the elderly that have to understand the detail of the various finance options. Commonly they will not have to explain the detail but they may have to answer questions about it. If their parents trust them to make these decisions then they have to be sure that it is the right decision.
We take a look at how the reverse mortgage works and provide some tips on what you should look out for before entering into one. [more..]

1 comment:

Bruce said...

Reverse Mortgages: Money for Nothing or Nothing for your Money?
It's a problem faced by many people, especially the elderly. On paper, you’re rich: you own your own home, an asset worth a considerable sum. But that doesn’t necessarily mean you’ve even got enough ready cash to cover the bills, let alone go on holiday or buy a new car. So what can you do?

Lending for spending
A whole new market of financial products has developed to meet the needs of the “asset rich but cash poor.” Most commonly, there is the reverse mortgage, which allows you to borrow against the value of your home. Recently, a company in Victoria called “Money for Living” came up with a more complicated scheme, which may have left some borrowers in a legal predicament now the company has gone into administration.

Get your lawyer to check it
As convenient as it might be, you should seek independent legal advice before taking out any such loan. Not sure why? Let us explain exactly what is involved in a reverse mortgage, and what can go wrong.

More on mortgages
Essentially, a mortgage gives the lender a stake in your property. The lender (in lawyer language, the “mortgagee”) is borrowing you money, but to keep their cash advance safe, they have certain rights over your property. If you default on the loan - that is, you don’t make your repayments in sufficient time, the lender can exercise the right to sell your property. This is why banks take the certificate of title to your property if you take out a mortgage; they want to make sure you’re not going to sell the property behind their back, pocket the proceeds, and run.

On the reverse
A reverse mortgage is different from a conventional mortgage: you had full ownership of the property, but now you are giving some to the mortgagee. You don’t want to lose something as important as your property, probably the result of years of hard work on your part.

In every other respect though, a reverse mortgage is like any other loan: someone, sometime, is going to have to pay it off somehow. Of course, the mortgagee is also going to be charging you interest. Assuming you can’t make the repayments, if the value of your home does not rise to meet the sum borrowed, the money will come out of your estate.

Not actually a reverse mortgage
There’s another pretty important reason to be careful. Like the scheme in Victoria, it may not be a reverse mortgage at all. Money for Living would purchase customer’s homes; the customers would get the purchase price, as a lump sum or in instalments, and a “guaranteed lifetime tenancy” to live in the property. In some cases, Money for Living on-sold the properties to investors, who were contracted to make repayments to the customer.

Concerned about what kind of legal rights customers still had in regard to their former properties, Consumer Affairs Victoria has been investigating the scheme. Now the company has gone into administration (very roughly, this is the company equivalent of intensive care), the legal situation is even more uncertain. Victorian Consumer Affairs Minister Marsha Thomson has urged any Money for Living customers to seek legal advice without delay.

Going forward, or going into reverse?
Unless you’re affected by the Money for Living scheme, there’s no need to be alarmist. Reverse mortgages can be as safe and useful as any other mortgage. It’s just that taking out a reverse mortgage is a major step. Scrutinise the small print of any contract carefully; consider whether you are prepared to have the money taken from your estate, and above all, enlist the help of a lawyer. A reverse mortgage could be the answer to your problem, but you need to know just what you’re signing up to.