Home Equity Release, Why Now?
As we start out on 2009, we will enter an era when the first of the "Baby Boomers" generation will be turning sixty years of age. It is estimated that between 2009 and 2016 there will be three million Australians reach the minimum retirement age, the impact of this both socially and economically will be immense. Home Equity Release and Reverse Mortgages may be a god send for many of them.
The History That Drives It...
At the conclusion of World War II in 1945, and after a disruption of some six years, thousands of Australian men and women returned home from duty, to family and loved ones, to pick up their lives where they left off. Within a year the population explosion that we call the Baby Boomers generation was in full swing.
From 1946 until 1961 the nation's birth rate soared, and over four million new Australians were born. This number also increased as a result of an upsurge in migration to Australia from Europe, with thousands seeking the promise of a new and better life on the other side of the world.
I am not going to go into detail on the global ramifications of this significant event, especially in light of the current credit crisis, what I am concerned about and feel important is, what this will mean to the people who will be looking at retirement themselves over the next few years.
It is a sad fact that less than 5% of the population have adequate money put aside to be able to enjoy retirement with the same lifestyle they have become accustomed to, when working full time. The same is true for all the "First World" nations of the world - Australia, The United States, Canada, Japan, and most of the countries of Western Europe.
In this country, many people are confident they will be able rely on the aged pension to help sustain an adequate retirement lifestyle. I often hear things like "my cost of living will be less when I retire". In many instances, this is true, though I think anyone would agree that things like medicine and healthcare will only increase as we get older, and perhaps by enough to absorb any savings in other areas.
The maximum amount for the "Aged Pension" at the time of writing is $562.10 per fortnight ($14,614.60 p/a) for an individual and $469.50 each - per fortnight ($12,207. each p/a) for a couple. This number is also affected by the value of any assets held (ie. shares, superannuation, savings, property - not including the family home) and any regular income received, things like superannuation payments or rent from a granny flat for instance. (For more information see http://www.centrelink.gov.au)
When the aged pension benefit is compared with the minimum wage (approximately $34,000 per year), it is not hard to imagine that the governments plan for our retirement is not particularly rosey.
What's the answer? We can invest more into our superannuation scheme to make certain we have resources enough to not have to worry about the aged pension. For many Baby Boomers it is much too late in the day for this to be a solution.
Perhaps property investment? This is an investment that is both tax effective and relatively safe thus it is favoured by many people. The price of residential Real Estate on average over the past 60 years has risen by 10.2% per annum, this means residential property doubles about every seven years (check out the numbers on your own home, how much did it cost, and what is it worth today?). Once again, though, this seven year cycle of doubling your money may just be too long to wait.
There is an upside to this gloomy scenario. A high percentage of people approaching retirement own their homes outright. The family home is (in a great many cases) the largest asset we will ever have.
The trouble is that we cannot eat it! So one alternative is to sell up and move to a more modest dwelling and "Cash In" on the change over. This scenario is not popular in this country, most of us are house proud and really don't want to move to an unfamiliar area, late in life, and away from family and friends.
This is where a Reverse Mortgage can help
A "Reverse Mortgage" or "Equity Release Loan" is a loan that converts the equity in your home into cash. This can be either in a lump sum or as a regular monthly income over ten years. You can also elect to have a combination of both. A Reverse Mortgage is similar to any other mortgage in so far as it is a loan secured by property. It's most unique aspect, however, is that no repayments are required until the home is sold.
Home Equity loans are designed for retirees or pre retirees over 60 years of age who have invested most of their income into their home and have less cash than they would like in retirement to enjoy life.
A Reverse Mortgage is restricted to a maximum loan to value ratio (L.V.R.) of about 40% of the value of the property securing the loan. For instance a home valued at $400,000 would have a maximum reverse mortgage amount of $160,000.
