How to get money out of your home without selling or moving
The Reverse Mortgage is under review with most banks now in 2019. Under the “responsible lending” requirements this would most likely not be as well supported for someone in retirement due to the higher interest rates and interest which is compounding onto the loan amount. This debt keeps growing over time. Previously these were used on the assumption that the value of the home was going up in value more than the cost of the interest. This is not a sure thing going forward. It has been that homes have gone up in value possibly more than the interest rate, but each location would vary.
A further disadvantage of a Reverse mortgage is that it uses the equity in the home which can leave the owner short of the funds that may be needed to change homes, downsize the home, or funds that may be needed for aged care and medical support.
A few financial institutions offer what are referred to as home equity release products. The financial institution buys part of the home (which is dependent on the location of the home and the prospects for future growth) for say 25% or another percentage. The future capital growth on the property is then shared with the institution in proportion to their percentage ownership.
Let us take the example of the home worth say $600,000 and $150,000 or 25% worth of the home is sold to the financial institution.. The home then increases in value to $1,000,000 the 25% or $150,000 value has now increased to $250,000 or more depending on the contract deal with the respective institution. In the case of a client who came to us after putting in place this arrangement it was not the best outcome. They had taken the $150,000 and left it deposited in a very low interest paying account with little return. About two years later the house needed to be sold to fund aged care costs resulting from dementia. The sale value of the house to the owner was only $750,000 as the other $250,000 plus had to be shared with the part owner being the financial institution.
Other options to consider are through the use of family members purchasing a part of the home or the entire home.
Whatever is being considered it should be carefully investigated and planned especially where Centrelink issues are concerned. We have had families come to us after the home has been sold and then wonder why their parents’ Centrelink pensions have been canceled. This issue becomes even more complicated when one partner has passed away. The surviving partner now as a single pensioner has a lower asset threshold and a higher value attributable to the home. Intelligent Estate Planning and strategic planning can help avoid major problems and create a win-win situation for families.