For example, the portion of the website describing the amount of money that can be borrowed through their reverse mortgage does not dwell on expensive possibilities such as extended overseas vacations, but instead emphasises future financial needs that older individuals may face sooner rather than later, and which may require funding through the equity in their home, such as health needs, accommodation bonds for aged care facilities, estate planning, and Centrelink benefits. This is a level of responsibility not always seen in reverse mortgage providers and is entirely to their credit.

As another example, Mariner Retirement, unlike some reverse mortgage providers, allows the borrowers’ children or other people to move into the home, so long as the borrowers themselves also remain on the property.

Mariner Retirement offers a flexible financial product, with the option of variable or fixed interest rates, for a term of one to twenty years, or over the life of the loan. Although no mention is made on the website of funds being available as a lump sum, they can be accessed as either a steady income stream or as an available drawdown line of credit, ready if needed.

Currently Mariner Retirement’s minimum loan amount is $10,000. The LVR varies between 15% and 50%, depending upon the age of the borrower, from 60 years to 95. Up to 20% of the equity in the home can be protected against repayment of the loan as a legacy for one’s beneficiaries.

Mariner Retirement offers a portability option should the borrower move home; however, if the move involves a downsize, and the balance of the loan at the time of the move is greater than the maximum amount that can be borrowed on the new house, the difference must be repaid at that time.

Mariner Retirement requires the property to be revalued every five years, with a cost varying from $300 to $500 or more, depending upon the value of the home. The borrower must pay for the valuation whether the loan is actually taken or not. Future valuations through the life of the loan not only allow the borrower to keep tabs on the equity position, but also provides an opportunity to arrange for additional borrowing should it be desirable.

There are no ongoing loan fees nor an application fee. Through 31 March 2008, a special offer from Mariner Retirement waives the costs of legal, settlement, and documentation fees, a savings of more than $1,000 to the borrower.

Mariner Retirement is a member of Senior Australians Equity Release Association of Lenders (SEQUAL), with full adherence to their code of ethics and business practices, including a strong no negative equity guarantee. All prospective borrowers are required to obtain independent legal and financial advice prior to taking the loan.

Prospective borrowers should be aware that Mariner Retirement’s financial products are not available over all of Australia. Their availability in any particular area can be ascertained by calling 1300 009 963.

As a full member of Senior Australians Equity Release Association of Lenders (SEQUAL), Vision Equity Release must adhere to a strict code of ethics and behaviour designed to protect prospective borrowers. Amongst other requirements, this includes ensuring prospective borrowers acquire independent legal and financial advice prior to entering into any loan, and the guarantee of no negative equity is ironclad against almost any action short of fraud or willful negligence on the part of the borrower.

The requirement that borrowers obtain independent financial advice is designed to ensure that Centrelink benefits are not jeopardised by the income generated by a reverse mortgage, and that the borrowers’ long-term financial needs are protected.

Vision Equity Living offers two basic reverse mortgage products, the Lifestyle Plan and the Freedom Plan. These two products are then subdivided according to whether an income stream, lump sum, or combination payout is preferred. The lump sum plan may carry a fixed or variable interest rate; however, the income stream, payable weekly, fortnightly, or monthly, over a set number of years between five and twenty, or until the percentage of available equity is fully utilised, is available only with a variable interest rate. Neither package appears to be available as a line of credit that can be arranged but left unused until required.

The minimum loan amount for the lump sum packages is currently $10,000, with a minimum of $200 per month withdrawn required for the income plans; there is no maximum limit. The Lifestyle Plan can protect up to 25% of the home’s equity from repayment of the loan upon discharge, with an LVR between 15% and 50% of the property’s value, increasing with the age of the youngest borrower to 95; the Freedom Plan can protect up to 20% of the home’s equity, with LVR ranging from 15% to 40% of the property’s value, also increasing with age to 85.

Vision Equity Living offers a portability option should the borrower move house. In addition, should the borrower still be paying on a standard mortgage, a lump sum can be drawn from the available equity to discharge it.

Although no repayment is required, principal reductions are allowed; however, break fees may apply, particularly within the first five years of the loan. The final amount of the loan is withdrawn from the proceeds upon the eventual sale of the property.

Vision Equity Living charges no ongoing maintenance fee. Valuations are required every three years. A current special offer waives the application fee, a saving of $695. The home owner is of course required to maintain the property to preserve its market value, retain sufficient household insurance, and see that all rates and taxes are paid.

When asked if the reverse mortgage had performed as expected, 26 of the 29 borrowers answered with an unreserved “yes,” however, two borrowers noted that, although their loans were not yet three years old, they had already exhausted their line of credit and other borrowers worried that they would “run through the money” much faster than anticipated. One borrower likened the $100,000 line of credit to the credit limit on a card that had no repayments; another, after running through a six-figure sum in two years, was forced to downsize to a much small home to repay his loan.

Obviously these individuals could not qualify as the world’s best budgeters, and equally obviously, lending institutions have enough to do without overseeing their borrowers’ spending habits. However, even for the best of accountants, it is inherently difficult to estimate the total sum that will be due at the end of a reverse mortgage, because that sum is dependant upon such unknowable factors as future interest rates and real estate values, and the number of years the borrower will remain living in the home in question.

The ASIC report identified several methods lenders could implement to assist borrowers in managing the funds accessed through a reverse mortgage; these include:

•    allowing a percentage of equity to be protected against the loan, to preserve it for the borrower’s future needs;
•    providing borrowers with a monthly statement, detailing not only the current amount owed but also debt in relation to credit limit;
•    including a forecast within the monthly statement, stating the month and year the borrower will have exhausted all available equity at the current average rate of spending; and
•    providing borrowers with personalised projections based upon realistic estimates of real estate values, interest rates, age expectancies, and the amount borrowed.

The Senior Australians Equity Release Association of Lenders (SEQUAL), the not-for-profit industry association of financial institutions writing reverse mortgages, has instituted some of the ASIC’s other recommendations, including bulletproofing the no negative equity guarantee against all possibilities short of willful neglect and fraud, and providing reverse mortgage calculators on lending institution websites that realistically reflect the effect of the loan on the home’s future equity. However, a search of the SEQUAL website did not turn up any action contemplated on the issue of borrower money management. As “all we have is this house” and poor money management has made at least one borrower lose his home, this seems an issue worth their time.

Perhaps the family home has been modified and renovated through the years, and certainly the garden has matured. However, nothing can ever alter that sense of rightness one feels upon stepping through the front door. More than a feeling of security or comfort, one has but to consider the word homesick—ill due to being away from that special place and curable only by returning—to understand the depth of that sensation.

At the same time, when viewed from the perspective of the cold world of microeconomics, the family home is strictly an asset: a major purchase, often the most major purchase, of a lifetime. It’s an investment of many years’ duration and the depository of a considerable store of funds in the form of home equity.

The bridge between these two perspectives has always been that of the sentimental asset, more properly known as an inheritance. After fulfilling its task as a home for the family, a house’s next expected role has generally been as a financial windfall to the adult children upon the passing of the parents.

However, after almost a generation of economic security and growth in Australia, this secondary role for the family home has become less important. Comprehensive and widespread education has helped raise the standard of living to such an extent that the younger generations seem to be doing rather better than their retired parents, and instead of waiting to inherit the old homestead, many of these upwardly mobile young Australians have chosen to take the plunge into home ownership on their own.

Therefore, the questions are: whose home (not house) is it? Do the adult children have residences of their own, and therefore their own sentimental assets? Do they want the old home at all, or do they intend to sell it when the time comes? Do they need the financial assistance of an inheritance from their parents, or do their parents, perhaps cash poor and asset rich, have a greater need for those funds while they’re alive?

A reverse mortgage could be the answer to this problem. By reversing the mortgage and withdrawing some of that equity saved through the years, cash-poor pensioners can fund their own retirement with their major asset, without the necessity of borrowing from their adult children, doing without the small comforts of life, or having to leave their home, retaining full ownership of their property. Arranged properly, a reverse mortgage can even reserve a percentage of that equity from ever being necessary to repay the loan, to serve as an legacy for one’s children, needed or not.

In addition to equity, there’s a large investment in sentimental value in one’s home, which must be considered during the decision-making process for funding one’s retirement. The desire to leave an inheritance for one’s offspring, no matter their age, is a strong and salutary one, however, there’s a balance to be found between that desire and the need to fund one’s retirement, between home and asset. A reverse mortgage, properly arranged, can make finding that balance easier rather than otherwise.

Various banks and other financial institutions offer allocated pensions. There is generally a minimum investment, and it’s important to note that additional deposits are usually not permitted. The rate of return for various allocated pensions will be determined by the level of risk acceptable to the investor and, of course, market conditions; negative investment results are also a possibility to consider.

When a super is rolled over into an allocated pension, the lump sum tax is generally deferred. Once the funds are within the allocated pension, investment earnings are tax free, and when the beneficiary is over age sixty, the income withdrawn is tax free, as well.

The allocated pension is assets tested by Centrelink and a portion of the income is deemed. Specific information should be sought from a Centrelink representative.

The Federal Government mandates minimum percentages retirees must receive from an allocated pension on a per annum basis. This percentage varies by age from 4% of the account balance for those under age 65, to 14% for those 95 and older, and these funds are transferred directly into one’s bank account on a regular, predetermined basis until the allocated pension has been emptied.

Allocated pensions can be arranged so that they continue to pay ongoing income to a dependant spouse after the original account holder’s death, or any amounts remaining in the account can be awarded to a beneficiary as a lump sum payment or simply left to the estate. Lump sum amounts can also be withdrawn, which do not count as part of the minimum percentage mentioned above; however, lump sum withdrawals, known as commutations, may be subject to the lump sum tax.

It is important to note that an allocated pension is not a magical money machine, but is limited in duration by the amount of funds invested. A small initial investment, subjected to the regular withdrawals mandated by the Federal Government, would not be capable of funding a person’s entire retirement no matter what rate of return the investment achieved, much less leave anything to support a surviving spouse following one’s death.

However, if combined with the funds from a reverse mortgage, the small super of many cash-poor retirees could be convinced to last much longer. A percentage of the equity in one’s home, accessed via a reverse mortgage, could be combined with one’s super and rolled over into an allocated pension, with another percentage of the equity preserved from the reverse mortgage to fund an accommodation bond, should aged care become necessary.

Of course, one should consult with an independent financial advisor prior to committing funds to any investment product. If such a professional is not currently among one’s resources, a suitable candidate can be located through the Financial Planning Association of Australia (FPA) via their website, www.fpa.asn.au, or by ringing 1800 626 393. Please note that FPA members are bound by a strict code of ethics and must maintain their high level of professional expertise through ongoing development courses.

While “the kinks” are being worked out of any system, not only will problems arise, but realistic and practical methods of solving them must also be found. During this exploratory period, it’s comforting for prospective borrowers to know that they have not been left without a map and guide.

Senior Australians Equity Release Association of Lenders (SEQUAL) is the not-for-profit members’ association of the reverse mortgage industry. Founded in January 2005 by the first banks and lending institutions to brave this new financial frontier, SEQUAL has grown to encompass 95% of the reverse mortgage market in Australia.

SEQUAL requires its members to adhere to a strict code of conduct, available in its entirety for public viewing on their website. This code of conduct includes such intangibles as requiring that all prospective borrowers be treated with respect and dignity. More concrete specifications include requiring members to participate in an external dispute resolution scheme, to reveal all costs in a clear manner to prospective borrowers, and to encourage them to discuss the loan with family members and an independent financial advisor prior to signing.

This code of conduct has evolved to meet the needs of this emerging marketplace. Changes made in 2007 include bulletproofing the guarantee of no negative equity that’s required from each lending institution. This guarantee, designed to ensure that no borrower will ever owe more than the realistic value of the home involved, previously could be breached under certain conditions; however, in August 2007, SEQUAL tightened up this requirement for its members, and now the guarantee of no negative equity can in general only be breached in instances of outright fraud or willful damage to the property in question.

SEQUAL also conducts training seminars to instruct the representatives of lending institutions and brokerages in the proper methods of analysing the needs of prospective borrowers and assisting in meeting those needs, offering accreditation courses for accountants, brokers, legal advisors, and financial planners. These courses include both online and in-house programs as well as national workshops.

However, it’s important for prospective borrowers to remember that, no matter the ethics of the member organisation nor the strictness of their code of conduct, banks are in business to earn a profit. While it is certainly permissible to form a professional and even agreeable relationship with the loan agent, one should keep in mind that a banker is neither a friend nor an independent financial advisor, and it would be improper and unwise to depend upon one in such a capacity. Prospective borrowers should seek out their own financial advice prior to taking out a reverse mortgage, no matter how ethical the banker—and SEQUAL strongly recommends that course of action.

It is difficult if not impossible to calculate, at the time of taking out a reverse mortgage, the total amount that will be due at the end of the term. This final sum is dependent upon several unknowable factors, including future fluctuations in interest rates and home values. Even the term of the loan cannot be determined, as it depends upon the long-term health and housing requirements of the borrower.

For this reason, one should preserve that nest egg even while accessing it, and there are means of doing so.

Prior to seeking a reverse mortgage, it’s important to remember that the borrower’s desires are in direct opposition to those of the lender. The higher the amount of the loan sold, the greater the bank’s profits, and often the higher commission paid to the customer service representative, whereas it’s to the borrowers’ benefit to withdraw as small an amount as will fulfill the current financial requirements.

Therefore it’s important to budget in advance. Prospective borrowers should have a sum firmly in mind, and not allow a sales pitch to talk them into a higher one. Remember, it’s always possible to redraw from the loan and remove more equity should the original sum not suffice, but it’s rather more difficult to put the money back where it came from after it’s been spent.

A second means of protecting that equity nest egg is to withdraw the money as a steady stream of income rather than a large lump sum, if at all feasible, even if the funds are to be deposited into an interest-bearing account.

The reasons for this are three-fold: Firstly, the amount of interest earned, even from a high-interest online savings account, is not likely to equal the amount charged through the reverse mortgage. Secondly, larger drawdowns are more likely to affect one’s Centrelink benefits. Thirdly, interest is charged only on funds that are actually drawn down; as the interest so accrued is added into the principal of the loan and accrues interest in its own turn (compound interest), accumulating rather quickly, it’s obvious that the less interest earned, the more equity will be protected.

For the same reason, one should shop around for the lowest interest rate, and the lowest charges and fees, including redraw fees and house re-evaluation charges. Some banks add these charges and fees into the loan principal, others withdraw them from the amounts paid out, however, both bite into that equity nest egg, leaving less for one’s own needs.

Shopping around, of course, takes only a few minutes on the Internet. Particularly useful are loan brokerage websites, which often gather all the data on the offers of various lenders into one spot for easy perusal, making it simpler to locate the reverse mortgage that will allow a comfortable retirement through one’s home equity without eroding it entirely.

Like any mortgage, a reverse mortgage carries an interest rate. It’s simply part of the cost of doing business with a lender, and certainly no surprise to anyone. What may surprise prospective borrowers, however, is that a reverse mortgage carries a higher level of interest than a forward mortgage, sometimes substantially so.

The reason for this difference is the risk to the lender. With a forward mortgage, as the amount of the debt is decreased, the lender’s risk is being lowered. Should the borrower’s financial situation deteriorate, the lender always has the option of foreclosing on the loan, evicting the borrower, and selling the house to recoup the outstanding amount.

With a reverse mortgage, however, there are no repayments during the life of the loan and therefore no corresponding lowering of the lender’s risk. On the contrary, with the increasing life expectancy among Australia’s senior citizens, these loans can easily remain outstanding for twenty to thirty years—and no banker, however hard-hearted, wants the negative publicity inherent in evicting a pensioner from his or her home.

For this reason, the interest rate for a reverse mortgage is higher than for a forward mortgage. However, the prospective borrower does have several options to consider regarding this interest rate.

All lenders of reverse mortgages are willing to write a loan with a variable rate of interest. Those lenders with a more flexible financial product are also willing to fund a loan with an interest rate that is either fixed or capped, both options either for a certain length of time or over the life of the loan. These lenders include ABN AMRO and Bluestone, which both earned a Five-Star Rating from CANNEX in their October 2007 rating of the reverse mortgage industry, in part for this very flexibility.

Unless the borrower arranges to pay the interest as it becomes due, these charges are added to the amount of the loan and accrue interest themselves (compounding). In this manner, the amount of the loan will roughly double in ten to twelve years, with the actual length of time taken by the process depending in large part upon the actual interest rate charged. Over time and without a no negative equity guarantee in place, it is theoretically possible for the amount of the loan to overwhelm the value of the house.

It is therefore to the borrower’s benefit to ensure the rate of interest is kept as low as possible. Even the difference of half a percent, over the twenty to thirty year life of a reverse mortgage, can mean the saving of tens or even hundreds of thousands of dollars. Shopping around amongst lenders for the most attractive interest rate and options should be part of every prospective borrower’s homework when considering a reverse mortgage.

The surface similarities are undeniable. Both financial products were meant for senior citizens. Both received heavy advertising, with swimmer Dawn Fraser and actor Paul Cronin touting Money For Living (both have since expressed regret for linking their names to the scheme).

Both Money For Living and reverse mortgages supplemented lean retirement pensions with funds received utilizing equity in the family home. With both, these funds were available as a lump sum, a steady stream of income, or some combination thereof. Money For Living even offered to pay the rates and the water bill—a step beyond reverse mortgages.

However, the Money For Living scheme was not a reverse mortgage as defined by the Australian Securities and Investments Commission. The scheme, which was termed “flawed but not illegal,” did not merely release the equity in a retiree’s home, but rather purchased the home then provided a contract to the former owners, guaranteeing them a life tenancy in return for $1 per year in rent.

With a true reverse mortgage, on the other hand, retirees retain the title to their home. The lender, rather than purchasing the property, instead attaches a lien to it, similar to any other mortgage, and pays the owner a percentage of the equity value in the home.

Money For Living collapsed in September 2005 and voluntary administrators were appointed. Civil and criminal charges were filed against Money For Living and its founders, Stephen and Gary O’Neill of Victoria.

The brothers had guaranteed a monthly income to their elderly clients without possessing the means to secure those claims. They also on-sold a number of these houses to investors without disclosing the life tenancies of the former owners.

One of the O’Neill brothers, Stephen, had already spent three years in jail for fraud, and had been banned from serving as a company director for a further five years. He was therefore in violation of his sentence through his affiliation with Money For Living.

As for the pensioners who had sold their homes into the scheme, not only did their monthly cheques cease arriving, but for a while eviction also seemed a horrible possibility. However, in September 2006 Justice Finkelstein of the Federal Court ruled that their life tenancies are secure, as long as they continue to pay their yearly rent of $1.

Despite the mud slung in their direction during this fiasco, reverse mortgages remain a powerful and sound tool in the senior Australian’s retirement kit. There is no good reason for pensioners to eke out a meagre existence and preserve the equity of their homes solely for their legatees’ benefit. If properly handled, that equity can provide a steady stream of income that doesn’t interfere with their pensions, nor strip them of all they own, nor risk the loss of their home.

It’s the difference between Money For Living Pty Ltd., and actual money for living.

The information in this discussion has been drawn from a Centrelink publication, however, it is intended as a guide only; for specifics, a Centrelink representative should be consulted (13 2300).

Centrelink employs two tests when assessing reverse mortgage proceeds for pension benefits: the income test and the assets test.

Equity withdrawn from a principal place of residence via a reverse mortgage is generally not counted for the income test. However, any amount over $40,000 will be counted for the assets test until it is spent, and any amount below $40,000 will be counted for the assets test if it has not been spent within 90 days of withdrawal.

This will in particular affect those borrowers who withdraw their equity in a lump sum, or as a combination lump sum and income stream, as it would be to their advantage to keep the total amount withdrawn per year below that threshold and spend the money before it would be counted.

There are certain conditions under which these withdrawn funds would be deemed as income under the income test. The word deeming means the funds are assumed to be earning a certain level of interest, and that sum is added to the sum of all income received from other sources to be used in the calculation of benefits.

To fully understand the ramifications of deeming, it is important to understand that deemed funds are presumed to be invested and earning interest, whether they are deposited in a high-yield capacity earning twice the deemed amount or stuck in a shoebox beneath the mattress. It’s all one to Centrelink.

There are two situations which deem as income the funds derived from a reverse mortgage on a principal place of residence: the first is gifting, and the second is investing.

According to a report issued by the Australian Securities and Investments Commission in November 2007 entitled “All we have is this house,” approximately 20% of the reverse mortgage borrowers surveyed took the loan with the intention of financially assisting family members, usually adult children in need of funds for housing or businesses. However, with Centrelink’s restrictions, these gifts may not exceed $10,000 per year, with a maximum of $30,000 in five years. Any gifts beyond that point sees the funds deemed as income under the Centrelink incomes test, with a resultant affect on the pensioner’s benefits.

Funds deposited into a financial investment are also deemed at Centrelink’s current rate, unless the investment is one not counted under the asset test, such as an allocated pension. In such a situation, the rule covering that financial product would apply.

It’s also important to understand that certain purchases made with funds received from a reverse mortgage, such as a car, may be counted as assets by Centrelink. This too may unhappily affect one’s pension.