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Date Published : Friday, May 02, 2008
When considering to retire, it is only natural to look at every possible way to boost retirement savings accounts and super funds. However, new research has revealed that some baby boomers may be going about it all the wrong way.
According to a recent study by Cannex, those taking out a reverse mortgage - which allows a retiree to re-mortgage their home, without any obligation to repay the loan until they sell the house or die - could be better off regularly dipping into home equity to finance their retirement, rather than taking out lump sums.
Cannex researched the long-term effects of taking out a reverse mortgage on a home worth $500,000, assuming it appreciated three per cent a year.
If a $120,000 reverse mortgage was taken as a lump sum, with an interest rate of ten per cent, the loan would grow to $340,000 over ten years, thanks to compounding interest.
However, if retirees opted to take the $120,000 in instalments over the course of the decade the loan would have grown to just $200,000 in the same period.
Cannex financial analyst Lauren Newlands told the news provider: "If you choose a lump sum, you will pay interest on the amount straight away, whereas if you spread the same amount out of instalments over time, your exposure to the compounding effects of interest is much less dramatic."
A recent report by the Herald Sun found that there are now more than $2 billion worth of reverse mortgages across Australia, representing a total of over 33,000 individual loans. This has grown ten-fold in the past five years.
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