Lifetime Retirement Income, part of the Retirement Income Group whose directors feature Ralph Stewart, Diana Crossan, and Martin Hawes, has launched a variant on the reverse mortgage.
Reverse mortgages are equity release devices for home-owning retirees, a way to cash up some of the equity in a freehold home.
Heartland Bank dominates this market, with some activity also from SBS Bank. No main banks offer the option, mainly because they sense a reputation trap with heirs who may not realise the family home has been encumbered with a mortgage.
The new Lifetime Home offer is a debt-free equity release income option for retirees aged 70 and above.
It's offer is unique: "No mortgage, no debt, no interest, just certainty and regular income to help supplement your day-to-day living in retirement."
But it is a way to access "the wealth" tied up in retiree's homes. They call it a "debt-free" option, but that needs a lot of explaining.
It does not give a lump sum at the start of the deal, rather delivers a modest "income stream".
This is how they say it works:
You are essentially exchanging an interest in your home for retirement income.
As the homeowner, you sell Lifetime Home normally a 35% interest in your home, which builds and accrues over a 10-year period (3.5% per year).
Lifetime Home buys the equity in your home, at normally 25% of the initial value (an agreed value via an independent valuation), which is paid over a 10-year period (2.5% per year). In addition there are fees and charges to be paid. The purchase price is paid by Lifetime Home in regular monthly income payments.
After 10 years, you retain normally 65% ownership of your home, with the option to extend the agreement if you wish.
After 10 years, whether you choose to extend your equity release or not, you retain the right to remain in your home for as long as you wish, as long as it is safe to do so, "and other terms of the agreement are met".
When you (or your estate) eventually sell the home, Lifetime will receive its interest of the sale price. (see example below).
"When the home is sold, we share the outcome together. If the property value has increased, we normally would share the value 65% homeowner and 35% Lifetime Home. If the property value has decreased, we share the value in the same proportions."
There is no "mortgage" but there is a legal agreement shifting a share of the property's value to Lifetime Home.
In summary, you will receive 2.5% of the initial value of the home each year. This will be paid less fees, fortnightly for 10 years (so, after those 10 years, you receive a total of 25% of the initial value of the home less fees and charges).
At the end of 10 years Lifetime Home will have a 35% interest your home.
Income payments cease after 10 years; however, you can remain in your home for as long as you wish, subject to the terms of the agreement.
The annual fee paid to Lifetime Home is based on the initial value of the home at the commencement of the agreement, at the rate of 0.23%. For a $1 million home, that is $2,300. The status of GST is unclear at this point..
The "retirement income" is worked out in the following way.
Firstly, there is the agreed initial value following an independent valuation.
The initial value of the home determines the retirement income payments.
Here is an example using an initial value of $1,000,000. Lifetime Home will be buying a 35% interest in the home, in exchange Lifetime will pay 25% less fees over 10 years.
Note the numbers represented are for demonstration only.
| Year | Homeowner Annual Income* |
Annual Fee* |
Homeowner Total Income Received* |
Lifetime Interest in Home |
Homeowner Interest in Home |
| One | $25,000 | -$2,300 | $22,700 | 3.5% | 96.5% |
| If the property was sold after one year, Lifetime would receive 3.5% of the sale proceeds. | |||||
| Two | $25,000 | -$2,300 | $45,400 | 7.0% | 93.0% |
| Three | $25,000 | -$2,300 | $68,100 | 10.5% | 89.5% |
| Four | $25,000 | -$2,300 | $90,800 | 14.0% | 86.0% |
| If the property was sold after four years, Lifetime would receive 14% of the sale proceeds. | |||||
| Ten | $25,000 | -$2,300 | $227,000 | 35% | 65% |
| Eleven | $0 | $227,000 | 35% | 65% | |
| Fifteen | $0 | $227,000 | 35% | 65% | |
| * paid fortnightly | |||||
At year 10 if the home is sold for $1,000,000, after real estate agent and other transaction fees for selling the house, the home owners will have received $227,000 in 'net' income over 10 years plus $650,000 residual from the sale proceeds as a lump at the end. Lifetime Home will have received $373,000, being $23,000 in fees over the 10 years, plus $350,000 as their share of the sale proceeds.
At year 10 if the home is sold for $1,250,000, after real estate agent and other transaction fees for selling the house, the home owners will have received $227,000 in 'net' income over 10 years plus $812,500 residual from the sale proceeds as a lump at the end. Lifetime Home will have received $460,500 being $23,000 in fees over the 10 years, plus $437,500 as their share of the sale proceeds.
Everything in this article is indicative only. How taxes work, including GST on the fees (if any), and income taxes on the "income" component, the application of the Bright Line test, and the like, will need specialist advice from a qualified professional and are not included in the above summary. You will also need to assess how future inflation will affect your position, especially in relation to the fortnightly payments. Do not enter into any agreement without first taking proper advice. This would be a major and significant transaction.
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