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Sharman Stone urges older home-owners in Murray to be cautious of reverse mortgages.



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The Hon Dr Sharman Stone MP Shadow Minister for Environment, Heritage and the Arts Shadow Minister for Indigenous Affairs Federal Member for Murray

Thursday, 21 August 2008

Media Enquiries: Robert Hardie 02 6277 4477 / 0418 432 909

Sharman Stone urges older home-owners in Murray to be cautious of reverse mortgages

Federal Member for Murray, Dr Sharman Stone is urging older home-owners to exercise caution when considering using a reverse mortgage to borrow against the value of their property.

Sharman Stone said reverse mortgages, sometimes used to top up retirement income, are not a free ride and it is important that people are wary when being encouraged to take out loans for more than they need.

“When people are not required to make loan repayments on reverse mortgages, there is a direct trade-off between having more money now and having less money in the future.”

“You are still charged interest on your loan, however instead of making regular repayments to cover it, the interest is added to your outstanding loan,” Sharman Stone said.

Dr Stone said as time goes on people end up paying interest on their interest which can have a severe impact on the equity of their home.

“For example, a loan at 7 per cent compound interest will nearly double in ten years, so if you borrowed $40,000 you will owe about $80,000.”

“Reverse mortgages may form part of a sensible financial investment strategy; however there have been instances where institutions have made loans to vulnerable older people, who may be asset rich but cash poor.”

“Until a higher standard of consumer protection is placed on these products the best protection home-owners can give themselves is to insist on all the facts - the negative aspects as well as the sales pitch,” Dr Stone said.

The benefits of reverse mortgages are having access to funds for much needed lifestyle changes. The risks include having too little equity down the track to move into supported accommodation, leaving a smaller than intended inheritance and failing to adjust your retirement lifestyle to a level you can afford on your retirement income.

Sharman Stone said the Rudd Labor Government must keep in mind the welfare of older Australians and do more to ensure residents in Murray do not need to borrow more money than they have to relieve growing financial pressures.

"Pensioners should not have to call on the equity in their home to find cash for groceries, petrol and rent.