Question 1

What is your opinion on reverse mortgages?

We fully own our own home, have no debts or dependant children, but are running low on cash reserves/ superannuation etc.

Our adult children are doing well and we would like to go on a few overseas trips while we still can as we are both in our mid-70s.

My husband is a Vietnam vet and so has a gold card. Your view would be much appreciated

Reverse mortgages have their place, for the right people.

A reverse mortgage is a loan allowing older homeowners to borrow money using their home equity as security, with no required regular repayments.

The loan must be repaid upon selling the home, moving out, or passing away.

They are generally used to provide you with extra income, or a lump sum, without having to sell your home and downsize.

They got a bad name when they were introduced to Australia but there are now many safeguards. These include a “negative equity protection”. This means your loan can never be worth more than your home.

Most providers also let you nominate a protected amount, or similar. For example, you may want to always retain say at least 25 per cent equity in your home, and they will calculate a lower loan amount that fits.

But reverse mortgages are not to be taken lightly and you should always let potential beneficiaries know about such arrangements.

(Also note, an equity release is different to a reverse mortgage. Under this arrangement you are effectively selling a percentage of your home. These arrangements can be even more complicated.)

Given the long-term nature of a reverse mortgage, it’s highly recommended you receive advice before entering into these agreements.

Many older Australians would like (or need) to use some of the funds in their home, but don’t want to move homes.

If you have no other money or income, then this could be suitable, especially if you have already considered whether you wish to leave an estate behind.

The Governments Home Equity Access Scheme is a reverse mortgage scheme for those who are age pension age or older. It’s a good place to start your investigations.

The HEAS is competitively priced as the interest rate is just 3.95 per cent a year.

However, it allows a maximum payment of only 150 per cent of the age pension. So if you are already receiving, say, 80 per cent of the age pension, then the top-up would be another 70 per cent (or you can choose a lower amount).

If you are not in receipt of any age pension, then you can get the maximum 150 per cent rate. There is some limited scope for a small upfront advanced payment as well.

If needing a larger income payment and/or a lump sum, then you would need to look at a retail reverse mortgage-provider.

Question 2

Hello Craig,

My husband (54 this year ) and I (57) are aiming to retire once I reach 60 (maybe one-three years later, depending on whether I’m still enjoying work).

We have four super funds between us ($220,000 from when I retired from the Australian Defence Force 20 years ago that’s just sitting there), plus a regular accumulation account that I contribute to ($850,000). 

My husband is receiving a Public Sector Superannuation Scheme pension already (an annual payment from a Defence defined-benefit redundancy), plus has another defined benefit ($165,000) and an accumulation account ($310,000) with his current employer (has been with it only seven years). 

Because of the defined benefit, we realise he will need to work full time and not reduce his hours prior to retirement. 

All super accounts are in a “balanced” option.

Because we are approaching the “five-year” window leading up to the big R (retirement), should we be looking at moving one account to a more conservative approach, and/or one to a growth approach? As a spread-the-risk type thing?

Hello,

First, it’s worth reviewing whether you both need multiple super funds.

It may be that you can convert one to a lifetime pension, and if that is the case by all means keep them separate, as long as there is a clear reason.

In terms of asset allocation, just because you are a few years away from retiring doesn’t necessarily mean you need to go too conservative with your investment options.

A couple of things to point out.

As your husband receives a guaranteed lifetime pension, this, in a way, can be considered a good conservative investment.

Second, just because you are retiring, that shouldn’t stop you trying to achieve a decent return. These funds will hopefully still be invested for another 25 to 30 years. Therefore your investment timeframe is still fairly long. However, if you plan to use some of these funds for a large lump sum payment (paying out a loan, big overseas trip etc), then perhaps they should be invested very conservatively.

You should be investing in accordance with your risk/return profile and your investment goals.

Given you have a lifetime pension plus considerable other super funds, you may need to invest only conservatively to meet your goals.

As you will retire soon and face a few key decisions, now sounds like a great time to obtain some personal financial advice. They can help you finalise your retirement and investment goals, including giving advice where to invest those funds.

Craig Sankey is a licensed financial adviser and head of Technical Services and Advice Enablement at Industry Fund Services.

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