The smarter solution for anyone retiring with a home loan

If house prices keep rising at current rates, retiring with a mortgage will be commonplace.

This is a problem for super funds: money flowing back into the housing market is no good for funds that need to manage the long-term income needs of their members.

But for older Australians, it’s a lot worse.

The trend means their lifetime super savings are being diluted at the worst possible time.

A recent report revealed the extent of the problem; most notably, it pointed out that when retirees moved to pay off property loans, they cut deeply into the super savings.

On average, when retirees took a lump sum from their super to pay down a property mortgage, they removed about 43 per cent of their entire savings.

So far, the solutions put forward to combat the problem include calling upon the super funds themselves to provide solutions, along with financial products that tap home equity such as reverse mortgages and home ­equity release schemes.

Most reverse mortgages allow retirees to borrow money using some of the equity in their home as security.

“Using the money in your home to avoid diluting your super is now an established strategy,” says Harry Chemay, the superannuation consultant who co-wrote the report titled The Growing Debt Burden of Retiring Australians, sponsored by HomeSafe, a home equity release product provider. Certainly, tapping the equity in your home is an answer for some investors, especially those who are asset rich but cash poor.

At its worst, it might look like swapping one mortgage for another, but the upside of these products is that a fresh income stream is released for the retiree; the downside is the family home is encumbered with new financial obligations to a third party.

For anyone who is seriously considering applying to tap home equity as an alternative to extracting a lump sum from their super, the government’s Home Equity Access Scheme, described by Sam Wylie of the Windlestone Group as “the best-kept secret for older Australians”, is an offer that cannot be ignored.

A reverse mortgage from the government is a lot cheaper than the commercial market.

As I reported last year, the terms of the government reverse mortgage scheme are nothing short of a giveaway.

A reverse mortgage in the commercial market will charge about 8 per cent but if you go with the government’s increasingly generous scheme, the rate is less than half that figure at 3.95 per cent.

And you don’t need to be receiving pension income to access the scheme; you simply must be over the age of 67.

Older Australians are going to be retiring with a mortgage more often in the years ahead.

Solutions may appear from any quarter, including big super funds, but it might be a long wait.

No financial product is perfect and home equity schemes will always come with a number of concerns, including the effective dilution of any plans you may have for those who may be set to inherit your estate.

Either way, the Home Equity Access scheme is open to all and will be useful to some.

For anyone seriously moving down this path, the government largesse available inside the scheme should not be missed.

This article first appeared in The Australian as A smarter solution to the looming crisis of retired mortgage holders