Financial institutions report a surge in people taking advantage of a type of finance called " Reverse mortgages ". Typically, these are the elderly who have paid off their homes and are now retired - but finding that the pension leaves a lot to be desired when it comes to a comfortable lifestyle.
The offer of a reverse mortgage is seductive - but also highly dangerous. It allows the owner to borrow money against the asset of the property they own to finance a more comfortable retirement lifestyle.
There are no repayments. The borrowed money - plus interest - is eventually recovered when the owner either sells the property or dies.
The problem is that taking up a reverse mortgage is a step into the unknown. All the calculations are done on the basis of conditions existing now - and who can foretell the future ?
At the moment interest rates are relatively low, but there are storm clouds over the home finance industry both here and overseas and nobody can accurately predict what level is possible even in the short term. Remember when rates hit seventeen percent over a decade ago ?
If interest rates rise - and at the same time house prices decline - the ratio of debt to asset can change dramatically - and quickly.
What started out as a small loan can gather steam and become a monster - and the retiree can find it consuming an ever greater degree of equity - until what was a comfortable nest egg has become a liability.
In some instances there is a place for reverse mortgages, but they should not be entered into lightly - and retirees should think long and hard - and do some quality research before signing on the dotted line !
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