We were
alerted to this when viewing a business programme lately.
There an actuary & a representative from a reverse mortgage association stated
that there rules were that if you were 65 & as most do wanted extra income then you could only borrow 15% of your
house value.
Why is this
so?
Simply that
if you draw more than that amount & don’t pay then your debt compounds.
You could end up with negative equity .
i.e. owing more than your house value.
If you look
at a current government site then you will observe an example
age 60 debt starts = 50,000
age 75 debt grows to 232,000
age90 debt has grown to 1,041,000
Assumptions:
$50,000 loan at age 60, no regular withdrawals, interest rate of 10% calculated
and charged monthly, $1200 establishment fees, $9 monthly fees added to loan
balance.
This doesn’t take into account your property appreciation.
However when we jog around the block older houses are pulled down as it is the land value that investors pay
for. Remember an ‘investment property’ is
allowed to depreciate.
yes 10% which is high today but what could they be tomorrow on average?
That is
what is happening to many with mortgages as many can’t get on top of their debt
due to lifestyle choices. We argue that a family needs to earn more than
$110,000 to live & ‘buy’ a house.
Hence their debt compounds as does the bank share
price.
Isn’t that
a reason to manage your debt. Yes there are plenty of calculators that tell you
what you need to do. However as in many instances in life it is all a matter of
expectations.
You achieve if you have goals & a
technique & a coach.
Only today
we had an article from a major fund manager explaining the magic of compound interest.
Yes that is true If = If you are an investor.
It also
said
‘Compound
interest can be the worst nightmare of a borrower as interest gets charged on
interest if it is not regularly serviced.’
It is Not true as it works against you if you
are a borrower.
Let’s
remember
‘debt is like weight & tattoos
Easy to get but hard if not UGLY at the end’.
It only takes
as we discussed with another yesterday for some
event to occur & the debt runs away from you.
We also
commented yesterday when arguably he was ‘moderately conservative’ that he had
borrowed 100% for his NRAS property. Hi
is actually ‘very aggressive’ if he
was sitting in front of us.
He
suggested that he had negative equity. What a great property investment &
of course encouraged if not stimulated by the big guys, government, banks, RE
agent & the media.
Will he go
to the ‘no win no fee’ guys? What commission
do they charge?
Very
possibly if a licensed financial adviser had but then a licensed adviser would not have put him into it in the first
place. It was his ‘want’.
Whoops.
Our role is to maximise the probability of you achieving
your financial objectives.
What do you need to do today so that you are better off
financially in three years time.
e.g. Monitoring your monthly cashflows might help you ‘Zap your Debt’.
Maybe then you
would not need a reverse mortgage as you have enough income as you also
invested more monthly.
John McAuliffe
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