With the increase of people’s average life expectancy and the improvement of the quality of life, pensions and general income after retirement often cannot meet everyone’s consumption requirements. Emerging products have emerged in the market that have reached the goal of supplementing their income after retirement. Taking the Australian market as an example, equity release products are mainly divided into the following three types:
Reverse Mortgage: This product is more famous and will be mainly introduced below;
Home reversion schemes: The consumer sells his property for 40-60% less than the market price, in exchange for cash and retains the right of residence until he/she dies or voluntarily leaves the house.
Shared appreciation mortgages (SAM): This product is also known as Equity Finance Mortgage, which means that the consumer sells a part of the value-added part of his / her property (Capital Gain) in exchange for a lower or zero interest rate on the home loan.
What is Reverse Mortgage?
So what is a Reverse Mortgage? As the name implies, the loan process of this product is reversed from that of ordinary mortgages. The accumulated interest on the principle we apply for when we buy a house is usually repaid over a period of time (e.g. 30 years). In the end, the liability is cleared and the consumer fully owns the property.
Home reverse mortgage refers to a consumer who mortgages part of his / her own property (eg 40% Equity) to a product issuer (banks), obtains cash (one-time payment of lump sum or regular income). However, the principal and interest do not need to be repaid until the consumer dies or voluntarily leaves the house, and the repayment of the principal and interest comes from the market value of the house at that time. In the end, the debt is cleared and consumers lose ownership of the home or sales proceeds.
Price on Reverse Mortgage product
A common feature of Reverse Mortgage products is that the product publisher guarantees that consumers will have non-negative assets when the property is eventually sold. That is to say, no matter how much the principal and interest of the final loan, consumers only need to pay for the real estate at the time. Investors who have learned the pricing of Derivatives will immediately respond-is this not a Payoff similar to a Put option? That’s right! For publishers of reverse mortgage products, NNEG’s guarantee is the value of the reverse mortgage product.
Although many factors restrict the market development of reverse mortgage and other equity release products, many people still believe that there is a place for such products in the foreign Australian retirement benefits system. When the pressure of the government age pension continues to increase and personal pension accounts cannot meet people’s post-retirement living needs, relying on more and more effective data collection, and encouragement by government tax and pension policies, equality release products are very promising. Rapid development and well complement people’s source of income after retirement.