Reverse mortgage vs downsizing - which is best?
11 October 2016
There is no right or wrong answer to this question as it really depends on your situation, and personal circumstances as a retiree. Ideally before you take any concrete steps one way or another you should make an effort to become fully informed of the pros and cons with regard to downsizing vs. reverse mortgage.
But first of all, some disclosure. I am passionate about reverse mortgages and therefore openly biased. In saying that, I am not actually against downsizing. Quite the opposite – at Heartland Seniors Finance we encourage prospective customers to consider downsizing as an option and include this in our application process as we want people to make an informed decision.
Philosophically, I would much rather an Australian senior downsize to enable them to live a better retirement than be miserable and have to tighten their belt in a house that doesn’t meet their needs. Still, you need to weigh up your options and do your due diligence before deciding to downsize or sign a reverse mortgage contract.
When weighing up options, I think there are three key factors that you should consider:
A house is often more than bricks and mortar – it is a home. It is full of memories and is what connects you to your community. The community is often where your family and friends are, and where you feel safe and secure. If you are strongly attached to your home, a reverse mortgage may be a better option as you can access the funding you need without leaving your beloved abode.
Moving house is not easy (just ask my wife who I dragged across the Tasman with our two kids at the beginning of the year), particularly if you are having to downsize and therefore reduce belongings. To release material equity often involves moving to a suburb that is further out from the city or town centre and into a much smaller house. Will you be comfortable with this? Where will the grandkids play and stay?
Selling and moving is expensive. There can also be agent fees, stamp duty implications and freeing up cash may affect existing government pension entitlements. One factor that is often not considered is that property growth on a lower value property will often be much lower than that of a higher value property in dollar terms. In fact, anyone who chose to downsize in Melbourne or Sydney in the last five years rather than take a reverse mortgage will be kicking themselves (hindsight is a wonderful thing).
[Related Article: Change to the Age Pension rules - how could you be affected]
If you are living in a large, valuable house that is too big for your needs, is difficult and expensive to maintain, and you can release material equity and maintain lifestyle, you should downsize.
But for many other seniors - from an emotional, practical and financial perspective - staying in the home and using a reverse mortgage to free up some funds to provide an improved lifestyle and peace of mind may deliver a much better result. After all, helping senior Australians live a better retirement is what we are all about at Heartland Seniors Finance