With a focus on cost-of-living pressures since the post-Covid spike in inflation, many homeowners have been investigating the benefits of downsizing or taking out a reverse mortgage – and sometimes both.
The impetus to downsize usually strikes so-called “empty-nesters” – those couples whose adult children are no longer living in the family home.
But levies such as stamp duty can act as a deterrent to downsizing without demonstrable lifestyle benefits.
Moving to a smaller, less expensive property is usually underpinned by a desire to live a more economical life while releasing cash to do the things you love.
An interim measure can be a reversible mortgage – a financial arrangement in which you can convert equity in your home to cash.
Here’s a quick explanation
Overview: A reverse mortgage is a special type of loan that lets you convert some of the equity in your home into cash, while still allowing you to live in the property. It’s typically available to homeowners 60 and older.
No Regular Repayments: Unlike a traditional mortgage, you don’t make regular repayments. The interest compounds over time and is added to the loan balance.
Bigger Balance: The loan amount, including interest, is usually repaid when you sell the property.
Equity Reduction: As the loan balance increases, your equity in the home decreases.
Access to Funds: You can typically access the funds as a lump sum, a regular income stream, a line of credit, or a combination of these.
Age-Related Borrowing: The amount you can borrow generally increases with your age. For instance, at 60, you might be able to borrow 15-20% of your home’s value.
Silver Lining: In a rising property market, the value of your home may increase faster than the cash you withdraw from your reversible mortgage. On that basis, your financial position will be stable. Of course, the opposite is true in a declining market.
Government Scheme: A government program, the Home Equity Access Scheme, allows you to apply for a non-taxable loan without penalty to your pension. The interest rate is usually around 4%, which is about half of a normal commercial loan.
Bottom Line: Ultimately, money from a reversible mortgage must be repaid. Usually this is done with the sale of the property against which the loan is held. It’s definitely not free money.
NOTE: The information in this article is general in nature and provided as a market overview only. Always consult your financial advisor or accountant for advice specific to your personal circumstances.