Life Stages > Looking at a reverse annuity mortgage

Looking at a reverse annuity mortgage

Graham and Ann own their own home without a mortgage and want some extra income. They have no children, so aren’t concerned about the idea of “eating their home”, as long as they aren’t required to move out. They want to make sure, however, that the income lasts until the second of them dies.

A friend suggests that a reverse annuity mortgage might help. Graham and Ann find out that it involves a mortgage linked to an annuity contract, which means that Graham and Ann get regular income from the annuity. The amounts they receive (including any initial lump sum) will have interest charged at 11% per annum.

And the growing total could mean that there will be nothing left of their equity by the end. While that doesn’t particularly worry Graham and Ann, they’re concerned that the costs might be a bit high. They decide to ask their lawyers for advice.

What they discover about the costs makes Graham and Ann wonder whether a reverse annuity mortgage is the right option after all. Not only is the interest rate on the mortgage itself quite high (more than the going rate for a normal home loan) but there are other costs as well. Their lawyers will be charging about $700, including expenses. There’s also a valuation fee for their home and a “placement fee” payable to the financial planner who introduced them to the provider.

Glossary: annuity
A type of investment where you pay a lump sum at the start, and receive regular payments (say monthly) for the rest of your life. Some annuities will continue for a minimum period, normally 10 years. You can also take out an annuity that is dependent on both your life and that of your partner's. Often the level of payment would reduce on the death of the first person. Normally the annuity payment is for a constant amount. It is possible to get an increasing amount to cover inflation, but it will cost more to purchase.
Glossary: lump sum
A large one-time payment of money.
Glossary: interest
Money paid in return for the use of money. If the bank is using your money (in a savings account) they pay you interest. If you are using the bank's money (via a loan), you pay the bank money.
Glossary: per annum
Yearly. Often shortened to "p.a."
Glossary: equity
The amount you would get if you sold an asset and paid back any money you owed on it. For example, if you have a house worth $350,000, and a $300,000 mortgage, your equity in your house is $50,000.
Glossary: provider
A company such as a bank, finance or insurance company that creates and provides insurance, mortgage, banking, savings or investment products.