Property Watch
Sun Herald
Sunday March 23, 2008
NEW loan structures mean that retirees are more cashed up than ever by tapping in to their own equity. In fact, if my parents time it just right, they can spend the last dollar of my inheritance just as they fall off the perch. Many would say good for them! For some, the idea of spending the kids' inheritance will undoubtedly hold great appeal, especially for baby-boomers wanting to "grow old disgracefully". It is no wonder then that reverse mortgages are viewed with deep scepticism by the rest of us. So let us ask: "What are reverse mortgages, are they something to be feared and what will it mean for the property market?"
Reverse mortgages allow those homeowners (usually over the age of 60 though this will likely change to include younger owners) to borrow funds against the value of their home. The loan will only need to be repaid when the owner dies, sells the property or goes into a nursing home. More than likely, though, at the end of the reverse mortgage, all the equity will have been liquidated and the institution will own the property. Reverse mortgage is not a bad description, although some lenders prefer more innocuous terms such as equity release. In essence these are reverse mortgages because they work in the opposite way to a standard home loan. On the home ownership spectrum, you have on one end first home buyers with a lifetime of income in front of them but no assets, and at the other end you have retirees who have plenty of assets but their best income-earning days are behind them. One group needs to acquire assets and the other needs cash. So first home buyers will use their future income to acquire a home and assets, whereas retirees might use a reverse mortgage situation to trade equity for money. Not all reverse mortgage funds will be used to pay for international flights and fine dining. I know of an elderly lady who owned a substantial eastern suburbs property that she had lived in her whole life only to see the enormous upkeep of the property cripple her financially. For elderly folk, reverse mortgages can be a lifeline that helps them maintain the upkeep of that possession they treasure most, the family home.An outcome of the rising popularity of reverse mortgages is that we now see a new breed of investor. Once upon a time when institutional investors spoke about property they meant commercial property. Now they are taking equity in Australian homes as well through all sorts of vehicles like reverse mortgages and shared equity loans. This newfound stakeholder in residential property will no doubt affect property markets. Institutions are unlikely to trade property in the usual way. This will affect turnover in the traditional marketplace. It will create price pressures in the long run by pushing the supply curve upward. In other words, fewer properties traded in the usual way is likely to intensify prices, especially at the top end.
© 2008 Sun Herald