Equity Release Facility:
This type of facility is sometimes been known as a Reverse Mortgage and is relatively new in the market place in Australia. Whilst the product was originally developed in the USA some fifteen to twenty years ago, it was implemented in the UK over the last ten years with various forms attached investment facilities. These facilities in the UK in the majority of cases failed to perform to expectations, due to these constraints. As a result of this learning process, the Equity Release products now available in Australia have taken on board these lessons, with a well balanced and equitable product similar to the US product now being released in 2004 with a new specialist financier entering the market with a very competitive product in September 2005. Since that time a number of other financial institutions have recognised the market and now have a range of their own services and products to offer.
This product is aimed at the retiree market who own their homes however have very little if any investment income, and are relying upon the pension to survive. The applicants can borrow up to 25% of their property which can either be paid to them as a lump sum, or taken as a monthly remuneration or a combination of both. In most cases the income aspect of these products will not affect the borrowers pension entitlements, however the borrower will need to verify their individual situation with their local Centrelink office, prior to entering into any agreement involving the income means test.
The borrower with this facility does not pay any monthly interest commitment, with the interest being capitalised ( i.e. added to the loan amount). As the facility is restricted to a predetermined percentage of the property value, the equity that still remains in the borrowers property should be maintained with the increase in the historical property values. There are safety valves built into these products that in the unlikely event the debt exceeds the value of the property, the difference is forgiven. The property still remains in the ownership of the borrower as with the usual mortgage arrangements. The loan can remain for as long as the borrower requires until the property is sold / refinanced or upon the death of the borrower/s. The most important thing to remember, is that the property still remains in the name of the borrower AT ALL TIMES.
The structure of the loan product is designed to ensure that client still has substantial equity retained in their home when they come to discharge the mortgage facility, relying upon the capital growth of the property to main or exceed the interest accumulation.
At this point in time the Australian Security and Investment Commission (ASIC) through APRA have not found anything adverse with these products and the way in which they implemented. The various financial institutions who provide these products work closely with the authorities due to the sensitive nature of the proposed borrower market to ensure that borrowers are not unfairly disadvantaged.The small number of financiers who specialise in this field have established an industry body known as SEQUAL. This is a voluntary body which the two government bodies, ASIC and APRA have been invited to participate. This body sets out the guidelines that all members must adhere too to ensure that customers rights and interests are protected completely. We at Finance Here only deal with those financiers who are a member of this industry body.
The staff at Finance Here are one of the few selected accreditated consultant groups to assist potential borrowers with these types of products. As part of our ongoing commitment to service and client responsibility, we insist on our client obtaining independent Financial Advice from a Licensed Financial Planner along with independent legal advice from their legal representative to ensure the client understands the product and it's benefits along with the constraints. When a Finance Here staff member visits you they will explain in full detail, often with the use of visual aids such as graphs and spreadsheet calculations to ensure that you understand completely how the product works and how it relates to the potential future property value increases.
Essentially, the criteria set in place is as follows; The maximum Loan to Value ratio which will be advanced where the youngest borrower is 60 years of age is 15% of the registered valuation. For example if your home is valued at say 300,000.00 then maximum that our lender will advance under the SEQUAL rules is $45,000.00 as lump sum. If you require a fortnightly payment, then this sum will reduce to counteract the fortnightly draw that is taken.
The Loan to Value Ratio increases by 1% per year of the youngest person applying for the loan facility. This is assuming that both people are on title of the property. For example if the youngest person is 65 then the Loan to Value Ratio will not be 15% rather will be 20% or if the age is 70 then Loan to Value Ratio will be 25% and so forth.
As most people are living longer these days, this ensures that the value of the loan does not exceed the value of the property some years later once the property is ready to be sold or the loan to be discharged. It also allows the borrower to have some funds left over for their beneficiaries, whilst at the same time maintaining their independence and dignity.
We have attached a link below to the ASIC/Fido web site which has a Equity Release Calculator (Reverse Mortgage) to play with. The Fido calculator does NOT have the safety valves built into, however, this calculator will show what could happen to the equity in your home if our preferred lenders did NOT adopt the SEQUAL protocol. It will also tell you what to look for when looking at a Equity Release Mortgage product. Finance Here abides in full with all the recommendations suggested in the FIDO web-site. To visit the FIDO web site please click on Fido below. To go the Fido Reverse Mortgage Calculator please click on the Calculator below. You will require Microsoft Excel to be installed as software on your computer to use this calculator. If you do not have Microsoft Excel installed please click here and send us an enquiry so we can print out the relevant calculations for you. When you click the calculator you will have the option of either opening the spreadsheet on your computer or saving the file.
Remember, if you have an enquiry, please click the link and let us help you with your answers.
