'Hardest day of our lives': Family moving after reverse mortgage disaster
They're the mortgages that directly target asset-rich cash-poor over-60s who might fancy a holiday or new car or need some renovations they couldn't otherwise afford. But these reverse mortgages that don't require any monthly repayments can have a disastrous impact. Trevor and Stewart Pitt, who on the weekend had to sell their family home their parents bought in 1958 to pay back a reverse mortgage, knew the day would come. "We knew that that would be the eventuality," Stewart Pitt told 9NEWS. "The day that the removalist truck turns up here is probably going to be the hardest day of our lives." His parents took out a reverse mortgage years ago to help fund their lifestyle. They were receiving a part pension and knew their house would be able to cover the mortgage when they died. The sons supported the move because they wanted their parents to live as comfortably as possible. "The equity loan allowed them the lifestyle and to buy a few things," Stewart says. "We're selling the family house basically because my parents took out a reverse mortgage. That's drawn down, we've taken out as much as we can so we have to repay it. "It (the interest) just continually compounds – that's the negative side." It compounded so much that the sons, who inherited the home, had to repay half a million dollars. The Australian Securities and Investments Commission warns reverse mortgages are complex and can have a significant impact on finances and relationships and quality of life in retirement.
It's undertaken an inquiry into the sector and is due to hand down its findings in coming weeks. "ASIC is reviewing the reverse mortgage market in Australia and expects to report on its findings in August 2018," the commission said in a statement to 9NEWS. "ASIC has found that some retired Australians can slightly improve or maintain their quality of life by taking a reverse mortgage, but they should still be careful about the long-term risks." Borrowers should always seek independent financial advice.
How the loans work
You borrow money using equity in your home as security. You can receive a lump sum, a regular income, a line of credit or a combination. The interest rate is higher than a normal mortgage (currently above six percent) and you don't make any monthly repayments. The interest compounds and is added to your loan balance.
The loan must be repaid in full including interest and fees when you sell your home or die or, in most cases, move into an aged care facility. ASIC warns because the interest compounds, "the debt will grow rapidly". Someone who takes out a $50,000 reverse mortgage at 10 percent at age 60 could owe $232,000 when they reach 75 and if they live to 90, could end up owing $1,041,000.
Laws were introduced in 2012 to stop a lender owing more than what the house is worth. But that doesn't necessarily apply to all reverse mortgage contracts signed before September 2012. Canstar group executive financial services Steve Mickenbecker said reverse mortgages could be useful but they could carry risks.
"The risk is you'll diminish the equity to a point you'll lose flexibility for the next stage in your life or your heirs don't receive the inheritance they expected," he said. Some can be left unable to afford the bond to move into a nursing home.
Reverse mortgages are usually limited to a maximum of 25 to 30 percent of the value of the home. Canstar rated the market earlier this year.