Concerns about reverse mortgages
There has been an increase in the number of financially hard-hit pensioners applying for reverse mortgages on their homes, say financial advisers.
This kind of home loan is offered only to the country's cash-strapped senior citizens who have houses with high values and no mortgage debt. They can either repay the loan while alive or leave the debt to be recovered from the estate.
Reverse mortgages are a fairly new concept in South Africa, but have been a popular option in countries such as the UK, Australia and New Zealand for up to 60 years.
A recent Deloitte study showed that the Australian reverse mortgage sector had reached a staggering R17 billion (A$2.5 billion).
Nic Craig, managing director of Seniors' Finance, South Africa's only home equity release loan provider, said it was not a product that they "aggressively" advertised, relying more on word of mouth and seminars.
"It's not for everyone. You have to be 65 and over and the loans vary depending on the person's age. In the past two years older people have found themselves in tough times and there has been more of a demand for this loan.
"Senior citizens also often rely on a fixed income, so when the interest rates come down, so does their income."
There were different reasons why people applied for reverse mortgages. Some people needed expensive medical care, "while others wanted that last hurrah like a trip overseas".
Property consultants Rode & Associates said fewer than 6 percent of South Africans employed in the formal sector retired with sufficient investments to allow them to live comfortably. Many of these senior citizens might be short of money, but lived in houses with high values and no bonds. Head of the company, Erwin Rode, said this product was popular in overseas but was only recently introduced here. However, concerns expressed included:
· The value of the loan plus interest may exceed the value of the property by the end of the loan period, which means that the borrower or his estate might have to sell assets over and above the house to repay the loan.
· In the case of married couples, the death of the borrower may leave the surviving spouse having to repay the debt, possibly having to sell the house to do so.
· It is risky to borrow money at interest rates linked to the prime rate to fund living expenses.
· If it is important for you to leave an inheritance to your heirs, a reverse mortgage could jeopardise your plans.
Some financial advisers have warned that it should be used only in certain scenarios and only as a last resort.
Financial coach Jillian Kipling said: "The danger is that they could apply for the loan without fully understanding the product. It is, after all, a loan, and loans need to be repaid with interest. Interest on reverse mortgages is usually relatively high.
"If a 65-year-old takes the loan against her home equity and then lives to 95, that's a 30-year snowballing loan. These products are based on the probability that pensioners won't live long enough to incur a debt bigger than the property value. The danger is that they might."
Article send in by Dormehl Property Group: www.dpgprop.co.za