Reverse Mortgages: Can Hollywood Stars Convince you to Take on More Debt?

You may remember Tom Selleck, the well-known actor from the 80s hit show Magnum PI. He has also appeared in the hit show Friends and the police drama Blue Bloods.

Now, at 71 years of age, he is doing a different type of TV. The American Advisors Group (AAG) has drafted him to promote reverse mortgages for seniors.

He is the latest Hollywood star recruited to recommend reverse mortgages. Other well-known actors trying to clean up the image of reverse mortgages include Henry Winkler, who played ‘The Fonz’ in Happy Days, Robert Wagner and James Garner.

The word mortgage has a Latin origin. It refers to the words mort (death) and gage (pledge), it literally means death pledge. That refers to the loss of the property if the debtor fails to repay the loan.

The AAG ad features Selleck — and his famous moustache — saying, ‘I know what you are thinking….I thought that reverse mortgages had to have some kind of catch. Just a way for the banks to get your house, right?

Well yes, we are thinking that. And the charming star doesn’t convince us otherwise. We know exactly what the catch is.

The Catch Behind a Reverse Mortgage

The fact is, reverse mortgages may convert your home equity into tax free cash payments. But they have a lot of disadvantages.

You don’t have any monthly payments for the money you borrow. But it is still a loan. And it is one that has to be repaid in full, plus high fees, when the home owner leaves the house.

Interest rates are usually higher than standard mortgage rates, by 1–2% points. And because it adds interest and mortgage insurance to the loan, the amount you owe keeps multiplying with time.

The loan is usually paid by the heirs, through the sale of the house. But if at some point you decide to move out to go live with a relative or at an aged care facility, you will have to repay the loan.

Plus you are still responsible for all the home costs and taxes. The bank can take your home from you if you stop paying these expenses.

Take a look at the following chart from ASIC, calculated on a 10% interest rate. It gives you an idea of how much the loan costs can spike up against your loan over time:



You may not be making monthly payments, but you are definitely paying. And interest just keeps accruing the longer you live.

So what happens if you outlive the value of the house? Your heirs may be left with a huge debt.

Reverse mortgages are becoming a hot topic in the United States. The National Council on Aging has launched a campaign called ‘Use Your Home to Stay at Home’ to inform seniors of how to use reverse mortgages to cover in-home health care.

And it’s becoming a common topic in Australia. The Productivity Commission is recommending retirees get a reverse mortgage or downsize to fund their retirement.

So, why the sudden push for reverse mortgages?

The goal is that you will retire with your mortgage paid off, right? So you can fund your retirement through your superannuation and age pension. And you can leave the property to your family as an inheritance, debt free.

You see, many baby boomers are now retiring. But they don’t have enough money to fund their retirement. The current 401(k) and superannuation pension plan systems came into play in the middle of their careers, so they have not accumulated enough.

According to Transamerica Retirement Survey, most baby boomers in the US are putting away 10% of their salary for retirement. Yet the average retirement savings is only US$147,000.

With a life expectancy of 25 years after retirement, US$147,000 accounts for US$5,880 per year. An amount nowhere near enough to survive on.

According to an OECD report, more than one third of Australian pensioners are already living below the poverty line. With high costs of living and longer life expectancy, this is only going to get worse.

And as retirees struggle to make ends meet during retirement, your home is no longer viewed as a legacy for the next generation. But as an asset to increase your debt and reduce your family wealth.


Selva Freigedo,
For Markets and Money

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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