Life Rights, are Reverse Bonds an Alternative?
Posted by Matthew Campaigne Scott
Making up for lost time during the Second World War, many soldiers returning home to Europe, North America and the colonies establishing families, the children of which are embarking on their retirement years round about now. Unfortunately this collective has been described as largely asset rich and cash poor.
Given that most people retire later than expected, still working long after retirement age, and having not planned adequately for their sunset years, choosing where to live is arguably the next biggest decision in the retirement process. Faced with the prospect of selling one’s property with the view to purchasing a retirement home, there are some options to consider.
Broadly speaking the options are Life Rights, share block, freehold or sectional title. The latter three are thoroughly marketed and explored. But ignorance regarding Life Rights continues.
Life Rights is the most widely used retirement home model worldwide. Life Rights offers the lowest purchase price relative to product. The fact that there is neither transfer duty nor tax payable is an attractive boon.
The purchaser does not have ownership of the unit. The ownership of the unit is retained by the development/complex and is not transferred to the individual as with sectional title. The purchaser has a right to live in the unit for the remainder of his or her life. In essence it’s like paying a lifetime of rental in advance. (This usually extends to a spouse or life partner upon the death of the other.) The unit though may not be bequeathed.
When the remaining party dies or chooses to leave the unit they or their estate are paid on the basis that the capital sum paid is returned plus 25% of the profit after costs. The percentage will differ from one development scheme to another and the amount or percentage is usually linked to the period of occupancy.
An additional benefit of entering into a life right scheme is that accommodation costs remain fairly stable, especially if the development offers a fixed for life levy.
Which bring us to Reverse Bonds or Reverse Mortgages.
It has been suggested by Rob Lawrence of Rawson Finance that some senior citizen consider a Reverse Mortgage. A Reverse Mortgage may be the answer to some who have paid up properties and no or little income to either maintain the properties or provide for themselves. The Reverse Mortgage is a loan paid in a lump sum, or monthly, to a recipient by the bank, against the security of a mortgage bond. No bond repayments are required and the funds advance can be used to purchase a pension or any other asset that can increase income. Alternatively, the proceeds themselves can be paid out as an income.
A reverse mortgage is an arrangement with some of the rules reversed while maintaining the basic principle of a mortgage. It’s still a loan secured by your real estate, but you don’t have any deadlines on payments as long as you live in your home or on your property. With a reverse mortgage, you basically convert the value or the equity of your home into cash.
Although Common in the USA, UK and Australia for many years, there are only two institutions currently that will offer this facility in South Africa: Nedbank and Senior Finance.
Some conditions usually include: 1) the bank, not an independent evaluator, will value the property, 2) the percentage bond advanced on the value of the property is dependent on the purchaser’s age, 3) the mortgagee has to be over 65 years old, and 4) any change in the ownership of the property automatically makes the sum advanced fully repayable.
Looking at the downside: What if the value of the loan plus interest exceeds the value of the property by the end of the loan period. This means that the borrower or his/her estate may need to sell assets in addition to the house to pay off the loan.
Upon the death of the borrower the surviving spouse may have to repay the debt, which could result in the need to sell the house in the process. A reverse mortgage could undermine your intention to leave an inheritance for your children and others, instead leaving a legacy of debt.
Conventional wisdom would have it that it’s risky business to borrow money to fund living expenses where the interest rate is linked to the prime rate.
The Reverse Mortgage is really aimed at the asset-rich/income-poor senior citizen who isn’t planning to live for decades and decades. A 65 year old taking out a loan and living to 85 has accumulated twenty years of debt plus interest. That’s quite a legacy.
After having spent ones whole life making monthly payments to this or that and worrying about debts perhaps living out ones retirement years under the obligation to ‘keep it short’ or pay up just may make Life Rights seem a lot more attractive.