LOUISE FAIRSAVE: The reverse mortgage
The reverse mortgage is a novel approach to earning retirement income. This approach is being considered for Barbados in the future.
A reverse mortgage is as the name implies, a mortgage in reverse – the usual mortgagor becomes the mortgagee and the usual mortgagee becomes the mortgagor.
For example, say that you have retired and find yourself with inadequate monthly income. Yet your home is a major asset mainly because you have either paid or nearly paid the mortgage. You can approach a mortgage finance company or a bank about converting the equity in your home into a fixed income annuity.
The finance house would consider your age and your life expectancy and compute what it considers a reasonable annuity payment for the rest of your life. The attractiveness of this deal is that you would be allowed to continue to live in your home yet receive the monthly annuity cheque from the finance house.
Typically a minimum annuity period will be defined. This is so that should you die relatively soon after establishing the reverse mortgage, the value of the balance of that minimum period of annuity payments would be payable to your beneficiary or estate. It is contemplated that through the normal longer term arrangement, the home would become the property of the finance house and the annuity payments stop on the death of the annuitant.
The reverse mortgage may also be structured to provide a specific annuity for a limited period. In such a case only part of the equity in the property is involved. Here, the property will remain that of mortgagee and may be bequeathed as a legacy. However, the inheritor of the property will need to repay the credit balance accrued on the reverse mortgage in order to clear that encumbrance.
The reverse mortgage can be adapted such that a close relative or friend serves like the finance house and agrees to purchase the house of the retiree. The purchaser arranges to pay the retiree a fixed monthly amount for an agreed period of time, whilst the retiree continues to live in the home free of cost.
This approach can provide an equitable distribution of the benefits from incurring the cost of supporting a retired relative among other relatives or friends who provided that additional support. For example, parents often find that the more well-off of their offspring tend to contribute to their upkeep in retirement.
Yet, at the reading of their will, the other children may be dismayed if the inheritance is not equally shared. The adapted reverse mortgage approach will provide the commensurate return for the contribution made to augment the retiree’s income and upkeep.
Given the expected ballooning of pensioners in the next 15 to 20 years, the reverse mortgage is seen as a likely approach for Barbadians.
Barbadians have a penchant for owning their home and for offering their children the best education possible. Both of these undertakings take substantial income to achieve; they are worthy but costly.
Commitments to such may result in inadequate personal provision for pension income. Then there will be a greater need in the future to augment government and corporate pension income from personal sources.
Furthermore, the retiree’s educated offspring may end up establishing homes overseas with little interest in resettling in Barbados. Worse still, if the retiree has lost his spouse or partner, becoming dependent on only his stream of retirement income, there is even more financial strain. In any event, as retirees live healthier and longer, the reverse mortgage is more likely to become a common financial tactic for Barbadians.
• Louise Fairsave is a personal financial management advisor, providing practical advice
on money and estate matters. Her advice is general
in nature; readers should seek advice about
their specific circumstances.