Ask Paul: What do you really think about reverse mortgages?

Dear Paul,

I have much respect for your articles in Money and have just read your response to the couple who are concerned about managing their SMSF as they age. Although it doesn't apply to me, it's an interesting read. 

On finishing the article, another one popped up on my computer screen. It suggests that there is a way for homeowners to sell part of the equity in their home to supplement their dwindling retirement funds. My question about this article, which has alarmed me, is this: do you support this idea? Or am I reading it incorrectly?

Some time ago I'm sure I read an article in Money about retirees taking a loan against their home where the interest accrues and is taken from the proceeds of the home when it is eventually sold.

I seem to remember you were not keen on the idea. It brought to mind a couple I knew who had taken a loan on the home with the interest-only option, and used the money to take the family to Disneyland! I was horrified with what they did. 

This current selling of equity in the home sounds just as horrendous as the previous plan for getting a loan. - Carla

Interesting question, Carla. Thanks for your kind words. I try my best to answer in a clear, consistent and unbiased manner, but here you have got me. You have picked up on my love/hate relationship with reverse mortgages, or home equity-style loans.

Where I hate them is "reverse compound interest", meaning your loan has interest added and it is taken from your estate.

I also hate them when people grab large loans and use them to purchase lifestyle items that add little value to a long life.

But I love them when I see older people with a valuable home taking, say, $1000 or $2000 a month to simply live a much better life.

Against a big city home in particular, $12,000 or even $24,000 a year is not likely to be a huge deal but, heck, that money can make their life much better while they live in their home.

I like this to be discussed in a family conference to ensure the kids understand what is happening. Incidentally, if the kids object to their parents living a better life in favour of a bigger inheritance, that also gets me really cranky.

I see many kids banding together to help mum and dad and preserve the family home, but that is a family decision.

Also, I always want the parents to seek independent legal advice before proceeding.

So, yes, done well at a later stage in life, I think these schemes can be brilliant. Done badly, they can be a disaster.

If later in life Vick and I were short of cash, we'd take out a small regular amount through one of these schemes in a flash!

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