Trade your house for retirement?

Let's face it, one day retirement planning will be relevant to everyone so let us take a look at how reverse mortgage works. First and foremost, a reverse mortgage is a type of home loan that allows you to borrow money using the equity in your home as security. The loan can be taken as a lump sum, a regular income stream, a line of credit or a combination of these options.

Interest is charged like any other loan, except you don't have to make repayments while you live in your home - the interest compounds over time and is added to your loan balance. You remain the owner of your house and can stay in it for as long as you want. You must repay the loan in full (including interest and fees) when you sell your home or die or, in most cases, if you move into aged care.

• If the elderly are still here, they are in possession of the house and have the rights to use or dispose the asset at hand.

• After the passing of an elderly, who is the official borrower, the financial institution may sell the home to repay the loan.

• After deducting costs and fees, the remaining money is distributed according to contract.

However different cultures view the optimal retirement lifestyle differently. Let's take China for example:

• Borrowing against your home to fund a quality retirement life contradicts the traditional custom of passing the asset down to your children or allowing children to provide you financial and mental care.

• Financial institutions' often will underestimate the property's market value. Consequently, you loan capacity will be limited and interest rates are generally higher than average home loans.

• In countries such as China, there are many blanks and gaps in the relevant laws and regulations, easily leading to disputes.

Let's turn back to look at Australia. At the end of 2011, there were 42,000 recorded reverse mortgage loans in Australia, totalling A$3.3 billion. Overall, this complex financial product is progressively being accepted and welcomed by Australian seniors.

Catherine Lane, Chief Lawyer of the New South Wales Consumer Credit Law Centre warned that reverse mortgages are not suitable for all seniors especially those with children. She said that applying for this loan is a very serious decisions. Before taking action to apply for the loan, elderly are need to ensure a sufficient amount is saved for future use in a nursing home., consider the consequence of maybe losing the eligibility to obtain certain government benefits and possible family disputes that may arise.

Now let's take a look at case. Don't worry you don't need to think, we will do the thinking for you.

Suppose a retired couple wishes to plan for reverse mortgage with a home valued at $1 million with annual interest rate of 6.4%. They decide to take out an initial lump sum loan of $100,000 and regular monthly required payments of $2,500 for a period of 13 years. Assume property price increase by 3.5% per annual, by the time you repay the loan balance on your reverse mortgage, your home's market price will have reached $1.56 million over the 13 years. The total loan balance repaid to the bank will be $850,000.

From this short introduction to reverse mortgage, we can see it is a new, innovative concept, but it is currently not as smooth, stressful as it may appear on the surface. Rather than using the equity in your home to borrow money to support a reasonable retirement lifestyle, why not start planning your superannuation from a young age so when you hit retirement, you will feel confident.