Is a home equity release too risky?
If you’re over 60, own your own home and find yourself in need of a bit of extra cash, using the equity in your home may seem like an appealing option.
And there’s no shortage of marketing out there suggesting you do so. A range of companies out there are looking to take advantage of cash-poor Australian homeowners.
We’ve taken a look at home equity releases and ask the question – does it ever make sense to borrow against your home, or is it simply too risk a financial move?
What is a home equity release?
Home equity release products generally borrow against the value of your house.
There are two main types of home equity release products available in Australia – reverse mortgages and home reservation schemes.
In a reverse mortgage you use equity in your home as collateral to borrow and repay the loan (with interest and fees) when you move out of the place of die. As a result, the final amount can be huge, depending on how much you’ve borrowed.
A home reservation scheme is when you sell part of the equity in your home and continue living there. When the house is sold, the provider receives the value of the proportion of equity originally purchased which, depending on how the housing market is going can be massive.
When home equity release might be suitable
ASIC recommends using your home equity may be suitable if:
- You want a small amount each year to supplement your income and you can afford to do this for many years (most products)
- You need a lump sum for home maintenance or renovations so you can stay in your home
- You want money for a critical need e.g. medical treatment
- You need a loan to secure aged care accommodation until you sell your home
When home equity release is not suitable
ASIC suggests using your home equity may not be suitable if:
- You are spending much more each year than you can afford for the long term (a better solution may be to bite the bullet and do some serious budgeting using our budget planner)
- You want to give or lend money to your family (it may affect your pension and you may need the money in the years ahead)
- The debt could eat into money you need in the future for medical bills, aged care or home maintenance
- You are thinking of investing - because you would be risking your entire home, not just the portion you are investing
Related links:
Are products keeping up to date with the ageing population?
Simple ways you can maximise your super
ASIC to weigh in on financial advice practices