Making money | Escaping that asset rich, cash poor trap

Retirement is a time to tap into every available financial resource, and if you’re a home owner who falls into the “asset rich, cash poor” category, a reverse mortgage can hold appeal.

Over the next 40 years, an estimated seven million Australians are expected to start living off their super savings, but many won’t have enough to live comfortably. The benefit of a reverse mortgage is that you can access money to live on without having to sell your home

A reverse mortgage is a loan that lets you draw down the equity in your home. It’s a product that is typically available once you reach age 60, and while no monthly repayments are required, full loan repayment falls due when you sell your home or pass away.

Limits do apply to the amount you can borrow. 

Turning to the family home to supplement your retirement income can make financial sense. The payments from a reverse mortgage can be taken as a lump sum or a series of payments or a line of credit, providing extra money to live on.

On the downside, loan interest is charged from day one and the mounting cost can outpace the growth in your home’s value. By law, you can’t end up with "negative equity"- where you owe more than your home is worth. Nonetheless, a stumbling block of reverse mortgages can be the impact on your estate. 

The key to managing a reverse mortgage is not to over-borrow. This works best when you draw down small annual amounts, and a few thousand dollars extra each year in the kitty can make for a much better lifestyle.

Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.