By Robin Bowerman
Wednesday, April 04, 2007 at 03:29pmA 70-year-old Queenslander is a “success story in the reverse mortgage stakes”, according to the March issue of Choice magazine, published by the Australian Consumers’ Association.
A Choice consumer report – Pawning your home? – includes the tale of how the Queensland pensioner’s life has gained an exciting new dimension by his extremely careful selection of a reverse mortgage and the use of the borrowed money to travel and for emergencies.
His most important decision was to select a reverse mortgage with a non-equity guarantee. This means the lender will cover any shortfall between the value of his home and its eventual sale.
Also significant is the fact that this homeowner is single. “I have only one nephew,” he says, “so I didn’t have any children to think of down the track. What I love best is the travelling. I’ve just come back from three weeks in India and will go to Italy next year.”
While acknowledging that this pensioner has managed to make the most of a reverse mortgage, Choice raises concerns about the contracts for many reverse mortgage products. (The magazine also examined reverse mortgages in last month’s issue.)
Reverse mortgages enable homeowners, generally over 60, to borrow against the value of their homes to receive an income stream or lump sum. The debt is generally not payable until the homeowner changes address – perhaps to move into aged-care accommodation – or dies.
Choice neatly summarises its consumer warning: “A reverse mortgage on your home can increase your standard of living in retirement but don’t sign a contract that could put you in danger of losing your home.”
The magazine measured the contracts for 23 reverse mortgages against six standards that it considers minimal for consumer protection. None of the contracts met all of these standards, with 10 contracts meeting five of the standards.
These standards are: default clauses only for major breaches of the contract, unconditional negative equity guarantee (explained earlier), non-fixed loan term, no requests for loan repayment, mandatory legal advice before borrowing, and a dispute resolution scheme.
Reverse mortgages should be approached with a borrower-beware attitude. See: http://www.choice.com.au/viewArticle.aspx?id=105198&catId=100296&tid=100008&p=1&title=Reverse+mortgage+shadow+shop
Before making any investment decision, you should always read the relevant product disclosure statement and consider the product in light of your personal circumstances before deciding whether it is suitable for you.
* Robin Bowerman is Head of Retail at index fund manager Vanguard Investments Australia. To receive this column by email each week go to http://www.vanguard.com.au and register with Smart Investing.
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