Normally borrowers can borrow up to 35 per cent of the value of the house
	Can choose to withdraw cash such as one lump sum, periodic payments or a combination of both.
	Usually all interest, fees and charges can be capitalized. (i.e. Loan repayments will not be required).
	Can be used for renovation purposes.

	New product solution in the market. As yet no long term track record.
	Very dependent on house valuation (market movements)
	The lender takes a mortgage over the property in the normal manner
	Normally a variable interest rate, set at a higher interest rate than the usual standard variable rate
	Family implications: bequeath the house to children, lesser inheritance, estate issues
	Interest charges have to be paid off at some time (when house is sold).

Reverse equity products for older people (such as reverse mortgages and home reversion schemes)

About reverse equity products

How reverse mortgages work

How home reversion schemes work

Think it over and get independent advice

Who should advise you?

What to ask

Some experience from overseas

Issues and concerns about equity release products?

ASIC's report into equity release products

FIDO's reverse mortgage calculator

About reverse equity products
As an older person you may own your home outright, but find that the pension or your other income does not always stretch far enough for your needs. You are unlikely to be able to take out an ordinary loan, if you don't have enough income to pay it off and you may not want to sell your family home.

'Reverse equity products' (sometimes called 'home equity loans' or 'equity release products') could be one way to meet this problem. Reverse equity products could be one way to meet this problem. However, before you go into one of these products:

	get advice that's independent of the business arranging your loan, for example, a solicitor
	make sure the product suits your needs and will not expose you to future risks that you might breach your contract or be evicted.

There are two main types of reverse equity products for older people in Australia, reverse mortgages and home reversion schemes.

How reverse mortgages work
Reverse mortgages allow older people to borrow money against the security of their primary residence. Repayments don't usually have to be made until you leave and move into care, sell your home or die. When the loan ends and the home is sold, you, or your estate, must repay what's owing out of the sale proceeds.

Each year the fees and interest you would ordinarily pay are added to the loan. Over time, you're charged interest on the interest, or compound interest, and that builds up the total amount that you owe.

Here's a basic worked example
Suppose you borrow $100,000 (including fees and charges) at an interest rate of 7.5% per year. Here's what you could owe at the end of various periods.

Time	What you or your estate could owe*
5 years	$143,600
10 years	$206,100
15 years	$295,900
20 years	$424,800

* rounded to nearest $100, assuming 7.5% interest applies throughout

As you can see, the effect of compound interest is dramatic and your loan could double in less than 10 years. And interest rates may increase during the life of a variable rate loan, so you could end up owing even more.

The impact of this could be reduced if:

	your home increases in value, or
	the reverse mortgage allows you to draw down amounts as needed rather than taking a lump sum upfront. Check if this option exists.

Suppose the amount of a loan increases to a point where it is more than the value of your house? This is called 'negative equity'. Some, but not all, reverse mortgage products guarantee that if this happens, you will not have to repay more than the value of your house when it is sold. There is also a risk that you might lose this protection if, for example, you don't repair and maintain your home to a standard set by the lender.

Try out FIDO's reverse mortgage calculator

How home reversion schemes work
In a home reversion scheme you sell part or all of your home to a home reversion company at a discounted price (usually between 35% and 60% of what your house is worth). But you have the right to keep living in your home until you die or decide you want to move.

There are two main types of home reversion schemes:

1	A sale and mortgage scheme - where you agree to sell your home, but final settlement is put off until you die or move out. Your home will be subject to a mortgage and a caveat, which means that you can't deal with the property without the home reversion provider's consent.
2	A sale and lease scheme - where the home reversion provider owns the house and leases it back to you.

If you can go on living in your home for a reasonably long period of time, you may be getting good value for money. However, if you die or have to go into aged care soon afterwards, you may have sold your home too cheaply compared with selling it on the market.

Some providers may give you back some money if your home is sold earlier than you expected.

And as with reverse mortgages, you need to be aware of the need and obligation to repair and maintain your home. With a sale and lease scheme it's the provider's obligation to repair the property. This means that you might think the house needs repair but the provider might disagree and refuse. On the other hand with a sale and mortgage scheme it's your obligation. This means you must repair the property to the lender's standard and risk eviction if you don't.

Think it over and get independent advice
In the right circumstances, a reverse equity product may prove a useful product for some retired people. However, this kind of product can have some important long-term effects on your finances. That's why responsible lenders offering reverse equity products ask you to get advice if you are interested in the product.

Take some time to consider carefully your likely financial needs in future. It can be a delicate issue to balance your need for some cash now against possibly cutting off other financial options later in life. If your home is your only really valuable asset, then borrowing against it may reduce your future choices.

A reverse equity product may also significantly affect how much money you can leave to your children or other people when you die.

Who should advise you?
Make sure you get a lawyer to read the terms and conditions and explain exactly what you're signing up for.

On the financial side, if you already use a licensed financial planning service, then talk the idea over with your adviser. If you don't use a financial planner, you could ask an accountant to help. You need someone who understands financial matters, knows your personal needs and will put your interests ahead of anything else. Always check how your adviser is being paid for the advice they give you.

What to ask

1	What are the upfront and ongoing fees (including legal, valuation, application, maintenance, insurance, early repayment and ongoing costs)?
2	What is the interest rate? Is it fixed or variable? (If interest rates rise, you may have much less equity in your home.)
3	How will it affect your pension and tax?
4	Could you be left owing more than your home is worth (ie a 'negative equity' situation)? Check the contract to find out what your obligations are if this happens.
5	Will you have enough money left to pay for aged care accommodation if you need it?
6	Will you be able to maintain and repair your home for as long as you live there? Many of these products allow the provider to evict you if don't.
7	Does someone live in your home with you? If so, unless they sign up as well, they won't generally have any right to live there after you die unless they repay the loan.
8	What are your rights if anything goes wrong? Can you get complaints resolved impartially and at low cost?
9	Would you be better off selling your home and moving to somewhere smaller?

Generally speaking, advice about borrowing money is not regulated in the same way as advice about other financial products and services. People advising just about loans, for example mortgage brokers, don't have to be licensed. However, the law can still protect you against misleading, deceptive and unconscionable conduct.

Some experience from overseas
In some countries, like the USA and the UK, reverse equity products are more widely used than in Australia. A couple of key points have emerged:

In the USA, some people have got into serious financial difficulties, even facing eviction from their homes, as a result of harsh loan terms and conditions, and from being talked into signing up for a product they may not have properly understood.

This shows the importance of not rushing into these sort of loans.

In the UK, consumer problems led to law reform that regulates advice about borrowing money, to help protect consumers from being sold the wrong type of loans. In Australia advice about loans is fairly loosely regulated, so you need to be fussy about the people who advise you.

Issues and concerns about equity release products?
ASIC is working closely with industry to promote best practice and reduce the risks for consumers and will monitor the marketplace closely to identify misleading, deceptive, or unconscionable conduct in the sales of these products. Please let ASIC know if you feel you have been mislead or deceived. Here's how to complain

ASIC's report into equity release products
In November 2005, ASIC released a report into equity release products. The report includes a number of questions that consumers should ask when considering equity release products and the issues and features they should be aware of when asking these questions.

For more information:

	read our media release
	download the full report (PDF file, 251 KB), or
	read the executive summary to the report (PDF file, 81 KB)

FIDO's reverse mortgage calculator
FIDO's reverse mortgage calculator lets you test how the choices you make about a reverse mortgage may affect your debt and equity over the longer term. It shows the effect of decisions you may make about:

	how much you borrow
	whether you take an initial lump sum, or arrange regular income payments or a combination of both
	how long you borrow for
	interest rates and various fees.

It also shows how your home equity may be affected by future changes in the value of your home.

Try out FIDO's reverse mortgage calculator

More information
For more information on equity release products, look at the National Information Centre on Retirement Investment's leaflet at www.nicri.org.au

More information on loans and credit
More information for retirees

Contact us:  enquiries@directadvisers.com.au