How Your Home Can Pay For Your Retirement

Written by Julie Brownlee on September 2nd, 2016

How Your Home Can Pay For Your Retirement

Ensuring that you have enough money to fund your retirement is an issue facing a lot of people.

What if the cash in your retirement annuity, pension fund or investments isn’t going to be enough?

Well, there is another option to consider.

Despite what most people would have you believe, your home can actually fund your retirement!

You could use the equity in your home to provide you with an income.

But how does this work?

What are the pros and cons?

Is it even worth it?

And how can you do it?

Let’s delve a little deeper into reverse mortgaging as an income strategy for retirees…

 

Uncovering This Income Strategy For Retirees

 

A reverse mortgage, otherwise known as an equity release mortgage, is essentially the opposite of a conventional home loan.

Once you reach the age of 65, you can apply for a reverse mortgage, and this releases a portion of the equity in your home to cash.

You can apply for a lump sum or monthly payments.

By applying for a lump sum, you could use it to buy an annuity to give you an income for the rest of your life.

But by opting for a lump sum, the impact of interest is higher than if you decide on monthly payments.

With this type of reverse mortgage, you don’t have to repay the loan until you pass away, move out of the property or sell it.

Once you vacate the property, you must repay the loan.

For example:

  • If you move out of the property into other accommodation, such as a nursing home. You will need to sell your property to pay back the loan.
  • If you pass away, the heirs to your estate are obliged to repay the loan.

As long as you live in your property, you must keep on top of any bills, such as insurance for your home and levies.

 

 

Pros And Cons of This Retirement Income Strategy

 

There are many factors you need to consider before deciding whether or not this is the right strategy for you.
 

Benefits of Reverse Mortgaging

Benefit 1: You Can Live In Your Home

If you want to release the equity in your home without selling it and finding somewhere else to live, this is the way to do it once you retire.

You will still have your home to live in.

Benefit 2: No Loan Repayments While You Live In Your Property

As long as you stay in your property, you don’t need to make repayments against your reverse mortgage.

Benefit 3: Reverse Mortgages Offer Consumer Protection

Just like home loans, reverse mortgages are regulated products.

This means consumer credit regulations govern them.

The onus is on the lender to give you all the relevant financial details of the loan agreement so you know how much the loan is going to cost you.

Benefit 4: You Can Use The Cash As You Please

There are no limitations on what you use the cash from a reverse mortgage for.

For instance, you may decide to use it to go on a lavish holiday or to settle medical bills.
 

Downsides of Reverse Mortgaging

Downside 1: Higher Interest Rates

The interest rates lenders charge for reverse mortgages tend to be higher than those for home loans.

This is why it’s important to scour for the most competitive rate and terms on offer.

Downside 2: The Impact of Fees And Interest

Your lender will add any fees and interest due on the loan to the loan amount.

This essentially increases the value of the loan you need to repay.

Plus there are other fees payable too.

Just like when you take out a home loan to buy a property, there are bond registration fees. And you’re also liable for property valuation fees too.

Downside 3: Your Financial Situation Is Dependent On The Property Market

If the property market was to slump during the term of your loan, the value of your home is likely to reflect this.

This means there won’t be as much capital in the property once you or your heirs repay the loan.

 

Is Reverse Mortgaging For You?

 

If you have limited cash available to fund your retirement, but have substantial capital tied up in your home, this is a great way to release it.

But if you're asset rich and cash poor, reverse mortgaging isn’t the only way of releasing capital in your home.

Make sure you explore all available options before making a decision.

You also need to consider your future.

If you have to move into accommodation providing nursing care, will you have enough money to do this once you settle your reverse mortgage?

And, if you plan to leave all your assets to your heirs, taking out a reverse mortgage will reduce the capital you leave to them.

 

How To Reverse Mortgage Your Property

 

Get Advice

If you are considering reverse mortgaging as a way to finance your retirement, don’t make any hasty decisions.

It’s essential you seek professional financial advice from an independent financial advisor or financial planner.

They will assess your financial situation and help you decide whether or not this is a good option for you.

If you decide to reverse mortgage your home, your financial advisor can also help you evaluate the contract from the lender.

Speak To Your Family

Consult with them before deciding on a reverse mortgage.

If they are to inherit your assets once you pass away, there may be other options to consider first.

Such an income strategy will impact your estate planning.

Applying For A Reverse Mortgage

To apply for a reverse mortgage, there are certain criteria that you must meet.

Ideally, this strategy works best if you own your property in its entirety.

But, if you don’t, you may still be able to apply for a reverse mortgage.

You can use some of the proceeds of the reverse mortgage to pay off any outstanding amount on your home loan.

The property must be your primary residence.

And the property must be structurally sound.

The higher the value of the property, the better.

 

How To Turn Your House Into A Retirement Fund

 

Once you've done all your homework, you need to ensure you’re 100% happy with a reverse mortgage before committing to one.

With this form of mortgage being relatively new to the market, even though it's very popular overseas, there are a limited number of providers offering them.

But if this is an income strategy that appeals to you, it’s worth investigating further so you can reap the benefits of the money you have tied up in your home.

Until then, here’s to profitable investing. 

Julie Brownlee | The Money Lab

Julie Brownlee
Editorial Contributor
The Money Lab