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Reverse mortgages

My mother owns a nice home, but is short of cash. My brother and I want her to enjoy her life and some of my friends think a reverse mortgage might be a solution. However, I have heard some criticisms of the product. What do you think?

I think they can be a good option where the home is valuable and the owner really is cash poor. However, they should not be rushed into and I’d like a financial planner, who can be trusted, to help in the process. If not, you should immerse yourself in all of the views on reverse mortgages (RMs) so your mum goes into the deal with her eyes open. And as it is a family thing, it would be great if the whole family was on the same page.

RMs are popular growing at 50 per cent per annum and worth approximately $1.5 billion.

A simple good example might be where a house is worth $1m and the owner borrows $200,000. If the house appreciates at 10 per cent a year and the loan averages around seven per cent over time, the 10 per cent on $1m will be greater than seven per cent on $200,000.

But there are some tricks to consider. RM experts say avoid taking out a lump-sum loan against the house because the compound interest in reverse will hurt as builds up over time.

As an a alternative you can take the loan as an income stream and then the compound interest only affects what you draw out.

Also check out the different products – some are dearer than others, which means some brokers who sell them could go for high fee paying options that line their pockets.

As always, it is imperative to receive financial advice from a professional.     

Book a complimentary first appointment with Switzer Financial Services today. 

Published on: Wednesday, December 02, 2009

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