EVER hear the phrase that nothing’s quite as valuable as bricks and mortar? With the help of either a reverse mortgage or a home reversion scheme, an increasing number of retirees who are planning on selling their home in the future are cashing in on past mortgage pain for a quick financial gain.

What is a reverse mortgage?

A reverse mortgage is exactly what it sounds like, a mortgage in reverse. Those who have paid off their mortgage can approach a financial institution to lend a sum of money against the property, at a slightly higher compounded interest rate.

For example, if your home is worth $400,000, you can borrow $50,000 at the start of your loan at a 10% interest rate.

After 10 years, you may have to pay back $140,000 and after 20 years, you may have to repay $386,000 assuming you’ve made no payments on the loan during this time.

So, it’s not exactly a long-term fix, but works better as a short-term cash injection or as a way to supplement your income through fixed regular payments if you’re planning on selling your home in the future.

What is a home reversion scheme?

A home reversion scheme, on the other hand, is a relatively new phenomenon and can guarantee you short-term cash without the painful compound interest.

You can agree to sell the bank a percentage of the profits when you sell your home in exchange for an agreed amount of cash.

The catch, though, is that the amount you borrow will be less than the percentage you agree to sell.

For example, you can agree to sell 25% of your home to the bank when you sell it. Again, let’s assume the home is worth $400,000, making 25% the princely sum of $100,000.

The bank may only offer you $60,000 for that stake depending on a number of issues such as your age and life expectancy.

That amount is fixed so even if the value of your property goes up, you have to pay the bank 25% of the price when you sell your home.

What do I need one of these for?

It may seem that reverse mortgages and home reversion schemes are a double-edged sword and, for the most part, they are, but if you go into the deal with full knowledge of the hidden fees and charges they can be a great way to get guaranteed money quickly.

You could need a new car, a holiday, renovations or money for unexpected medical bills and family tragedies.

If you’re planning on selling your home in the relative short-term (10-15 years), a reverse mortgage can be great to get money quickly without letting the compound interest get too high.

On the other hand, a home reversion scheme is guaranteed money today without the hassle of repayments.

If, after a lifetime of scrimping and saving, you find your super fund hasn’t paid you out quite enough to live on, you can set up the lump sum as a series of regular payments allowing you to live comfortably.

If you’re planning on downsizing to a smaller home in any case, an equity loan such as a reverse mortgage or a home reversion scheme can get you the profit from the move before it’s actually happened.

What should I look out for?

The first thing you should be on the look-out for is credit agencies promising easy money.

As with all investments, you should be wary of those who make burrowing money seem easy, and then ply you with 50 pages of fine print.

If you’re confused about any aspect of the loan, don’t be afraid to ask questions, even if they seem mundane.

It may even be a good idea to bring someone you trust along to talk to the credit agency.

Unfortunately, there’s no such thing as “no strings attached” when it comes to loans. As discussed earlier, the compound interest on a reverse mortgage can be a real killer if you leave it too long to pay back the loan.

Take our earlier scenario involving the $400,000 home, for example. If we were to borrow $100,000 against the equity of the home at a 10% interest rate, in five years you could have a debt of $165,000 and five years later that can explode to about $274,000.

Any longer than that, and the amount you owe could be astronomical! In fact, in some cases, the amount you could potentially owe to the bank is larger than the value of the home, making the loan a losing bet.

Fortunately, a lot of reverse mortgages offer what is known as a No Negative Equity Guarantee (NNEG), which guarantees that the amount you owe the bank can’t exceed the value of the property.

Still, make sure that the equity loan you end up going for includes a NNEG, or you could find yourself in a world of financial hurt.

Also, it’s a good idea to check the fine print for things like penalties for backing out of the deal after a certain amount of time, requirements on your part to maintain your home to keep the value up, or a requirement to keep a certain amount of insurance on your home.

Also, perhaps a little pessimistically, people tend to underestimate how long they’ll live. When making long-term financial plans, it’s always important to over-estimate how long you’ll live so that you’re not left with a mountain of debt or no home when you’re 90.

In the case of a home reversion scheme, you could agree to sell 25% of your home to the bank at a later date for an arranged price of $60,000.

If the value of your home goes up 10%, by the time you get around to selling it the bank could end up taking $110,000 out of the home’s final price.

The most important thing to remember, though, is that you seek professional advice before you undertake any major financial commitments such as a reverse mortgage or a home reversion scheme.

Reverse mortgages and home reversion schemes can be a good way to secure short-term cash if you’re having trouble finding the money elsewhere, but there are risks associated with them so it’s important to make the decision with care and due deliberation.

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