 The reverse mortgage market is booming, but experts warn retirees to access the equity in their home as and when it's needed rather than taking out a lump sum, to avoid the compounding effects of interest and make their home equity stretch further.
The difference between taking out a lump sum versus taking regular chunks of equity out of the home is major.
“If you choose a lump sum, you will pay interest on the amount straight away, whereas if you spread the same amount out instalments over time, your exposure to the compounding effects of interest is much less dramatic,” said Cannex financial analyst Lauren Newlands.
Cannex researched the long-term effects of taking out a reverse mortgage on a home worth $500,000, assuming it appreciated 3 per cent a year.
If a $120,000 reverse mortgage was taken as a lump sum, with an interest rate of 10 per cent, the loan would grow to $340,000 over 10 years, thanks to compounding interest.
If retirees opted to take the $120,000 in instalments over the course of the decade the loan would have grown to just $200,000 in the same period.
With now more than $2 billion worth of reverse mortgages, it's clear that baby boomers aren't prepared to give up on their big spending lifestyle once they hit retirement, and their home is their biggest asset having largely missed out on the benefits of compulsory superannuation.
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