The idea behind reverse mortgages is that older homeowners can cash out part of their home's value, with the funds received either as a lump sum, a series of cash payments or a combination of both. The money can be spent however the homeowner chooses, be it to buy a new car, take a holiday or simply meet living expenses.
A strong point of appeal with reverse mortgages is that no repayments are required until you sell the property or die. However, interest is charged from day one, so it doesn't take very long for the overall debt to escalate, potentially outpacing the increase in your home's value.
To see just how quickly the debt can snowball, let's say that a retiree aged 65 takes out a reverse mortgage, receiving an initial lump sum of $50,000 at the start of the loan, with a further $500 a month paid for the first five years. By the time the homeowner is in his or her mid-80s, the debt plus interest will have grown to $400,000.
The mounting debt may alarm family members, but it should also concern our homeowner.
That is because around 50pc of both men and women currently aged 65 have a 50pc chance of living to their mid-80s.
“One of the things you hear all the time is how this program made a really big difference in their lifestyle, just in little things, like now they can take their grandchildren to get ice cream,” Burns said.
How great will that work out in the end? Sure it feels good now but if it costing seniors their savings and really costing about double due to all the fees and interest how good will that really taste?
We are also wondering about the clause to keep up the property. How is the homeowner going to keep up the property in their 80s when they have no equity for maintenance? And how are we going to evict people whose houses are in disrepair but their Reverse Mortgage requires the house and property to be maintained? If these are not maintained properly the value will decline. The problem is already messy, and the strong push for Reverse Mortgages will make things even messier.