A report from the Australian Securities & Investments Commission (ASIC), released November 2007, surveyed a group of seniors who, within the previous three years, have taken out a reverse mortgage. The survey was intended to shed light on why retirees sought the loan and what factors influenced their decisions.

One of the major conclusions reached by the writers of this report is that, in order to make wise and informed financial decisions, retirees need several sources of high quality, independent advice (pg 45). Three sources of advice were specifically mentioned.

The ASIC survey found that, even amongst borrowers currently holding a reverse mortgage, these financial instruments aren’t well understood. Some borrowers reported being surprised at the fees and charges incurred; others did not understand all of the conditions under which they would be in default on the loan. To prevent such surprises, the prospective borrower should have an independent solicitor review the contract, not only to ensure that the paperwork is “kosher” but also to ensure their own comprehension of all the loan’s terms and conditions.

If the prospective borrower receives government income support, additional advice should be sought from a Centrelink Financial Information Services (FIS) officer to determine what impact, if any, the reverse mortgage funds will have on those benefits. Centrelink considers numerous factors when assessing funds drawn from a reverse mortgage, including whether the loan is applied to a primary residence or rental or vacation property, the amount drawn down, how quickly the money is spent, and what has been purchased. For example, the purchase of a new car is generally deemed an asset and may reduce one’s benefits, another unpleasant surprise that can be avoided with sound advice.

Perhaps most importantly, the prospective buyer should seek counseling with an independent financial advisor. In this interview, consideration should be given not only to the prospective borrower’s immediate and short-term financial needs, but also to what may happen twenty or more years in the future.

It’s not a happy thought, but the future may include funding an accommodation bond for an aged-care facility, or paying for increased health care or medical procedures. If the prospective borrower has not allowed for these possibilities and reserved a significant portion of the home’s equity under the terms of the reverse mortgage, there may not be sufficient funds remaining to cover these needs, possibly the most unpleasant shock of all.

An independent financial advisor can assess one’s current situation and plan for those future needs. With such assistance in drawing up a long-term budget, the prospective borrower is more likely to exercise discipline and good judgment, and less likely to “blow through” the funds available.

A reverse mortgage is a powerful financial tool and used properly it can benefit the borrower for many years. However, used improperly or with poor consideration of possible consequences, like any tool it can harm the user.

The not-for-profit members organisation for reverse mortgage providers, SEQUAL, requires prospective borrowers obtain their own legal advice, and strongly advises they also speak with Centrelink and financial advisors. Sound advice from independent counselors is the most powerful tool of all.