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Reverse mortgages: take care and beware.



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The Hon SUSSAN LEY MP Federal Member for Farrer

Shadow Minister for Housing Shadow Minister for Women

14 August 2008

MEDIA RELEASE For immediate release

Reverse Mortgages: take care and beware Older home-owners should exercise caution when considering using a reverse mortgage to borrow against the value of their property Shadow Minister for Housing, Sussan Ley said today.

Ms Ley 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,” she said.

“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,” Ms Ley said.

Ms Ley 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,” she said.

“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,” Ms Ley 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.”

Ms Ley called on Prime Minister Rudd to keep in mind the welfare of older Australians and not to suggest they borrow more 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," Ms Ley said. -ends-______________________________________________________________________________

Media contact: Georgina Wilson (02) 60213264 0428 213264 georgina.wilson@aph.gov.au