Unrealistic Interest Rates !

The Australian government is under pressure from the 180,000 citizens who find themselves asset rich but lacking the income to put food on the table and meet normal living expenses.  They are invited to solve their problems by signing up to what is described as a " reverse mortgage " source of spending money.

People are told they can unlock the money tied up in expensive items like the home they live in by using it as collateral for what is termed an " unpayable loan "..   The reality is that this is expected to tide them over for their few remaining years and the amount owing will be deducted from their estate after death.

The financially astute are quick to point out this government scheme has an unrealistic interest rate applied to what is essentially a " secured loan ".  Interest on the money withdrawn will be at the rate of  4.5 percent, and that has been reduced from the 5.25 percent that applied to the scheme last year.

  Those are interest rates the public can only dream about.   Australia's Reserve bank has been consistently reducing interest rates to try and stimulate the economy hammered by this coronavirus and the lockdowns imposed to halt its spread.  Mortgage rates are in fierce competition between the banks but the wise know that they will eventually rise to more traditional levels.. The official interest rate is now at a record low of 0.1 percent and the ten year bond rate has fallen from about six percent in July, 2008 to one percent now.

People entering the housing market are being offered an initial mortgage as low as a little over two percent, which quickly rises a little higher if they lock in the term for a period of time.  Conventional wisdom indicates that eventually interest rates will rise to traditional levels as this pandemic finally leaves the financial scene.

Interest rates can be volatile.  A few years ago market jitters sent rates skyrocketing and they reached seventeen percent for a short period of time.  Nobody can accurately predict what rate may apply at any time in the future, but the trend must be upward.  At the moment they are perilously close to zero.

Asset rich elderly people would be very unwise to virtually " borrow money " at this unrealistic interest rate charged by the government on " reverse mortgage " loans.  The equity they hold in their homes can quickly disappear because as a race of people we are consistently living longer and reaching extreme old age.  If reverse mortgages are to become viable, the interest rate charged must be comparable with what is charged  for people buying a home.

If nothing else, this anomaly will draw attention to what is termed the " deeming " rate applied to assets owned by people drawing the aged pension.  For the purpose of valuing their assets it is " deemed " that they earn an interest rate much higher than can be obtained in the market place.  In some cases, this unrealistic valuation results in a reduced pension being paid.

This " reverse mortgage " debacle questions the governments integrity  !