Ask Paul: Should I get a reverse mortgage?

Dear Paul,

I am 67 years old and don't have a large bank balance. When my funds dry out, is it safe to get a reverse mortgage?

Not knowing whether it is a safe option, my thoughts were that it was best to ask your opinion on this situation. Thank you. - Hirani

What an excellent question, Hirani. Reverse mortgages can be an absolute disaster if used incorrectly, but in my opinion they are incredibly valuable if used well. Obviously, the longer you leave getting one and the less you take out, the slower the growth in the size of your loan.

I would really like you to read the information on the Moneysmart website. This is a government site, not a sales pitch from a reverse mortgage company, so you will get unbiased information.

As you mention, you would do this when your funds run dry. I think I can safely assume you would already be on a part pension, gradually moving to a full pension as your capital reduces. This is important. A pension greatly reduces pressure on your capital and it will last longer.

But also because pensioners can contact the Department of Social Services and discuss the government's Home Equity Access Scheme, which is bureaucratic language for a reverse mortgage! You could get up to 150% of the age pension as a fortnightly payment.

This is exactly how a reverse mortgage should be structured. Frankly, they are just awful things if a large lump sum is taken out at a relatively early age from a lender who charges high interest. Compound interest works against you very badly if you have a large amount borrowed at high interest for many years.

But most of us don't need a large lump sum; we want a regular amount to allow us to lead a better life, day to day. The great thing with small, regular amounts is that they don't build too quickly into a large amount.

Regardless of whether you use the government scheme for pensioners or a private lender, I would strongly suggest you get independent advice from a solicitor. I also think this is a good conversation to have with your family so they understand your plans. Obviously it will have an impact on your estate at some time in the future.

It is certainly not for our kids to demand we live poorly to preserve assets for them, but I often find that adult kids are unaware their parents are not finding their money situation easy. Life is expensive. In some cases, I see that adult kids work with their parents to provide a "family reverse mortgage". Providing this is drawn up by a solicitor, it can work very well. But an undocumented family agreement like this is inevitably a complete disaster.

Sorry, a long answer. But the short answer is that, yes, I really like reverse mortgages where we draw small regular amounts from a quality lender at sensible rates of interest, with an ethically based contract that protects vulnerable older Australians. Critically, always get independent legal advice.

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