Reverse Mortgage: A Strategic Tool for Intergenerational Wealth
Bank of Mum and Dad & Reverse Mortgage a Tool for Intergenerational Wealth
The Bank of Mum and Dad is the 9th largest mortgage lender in Australia according to the Australian House and Urban Research Institute. 60% of first-home buyers have family support to buy their first home, up from 12% in 2010 according to the University of Newcastle. These factors combined with historically low wage increases mean millennials and Generation Z will rely on the wealth of previous generations for financial security more than any generation before. This article will show how a Reverse Mortgage coupled with the government’s first guarantee can be utilised to help future generations and ensure they are financially secure in these financially uncertain times.
Currently, the most common way for a parent to help a child purchase a property is by going guarantor and putting their property up as collateral. This allows the children to buy a property with minimal deposit to no deposit and avoid LMI, but if the children have financial issues and cannot pay their mortgage the lender can come after the guarantor’s property. However, a safer way for a first home buyer to avoid LMI is for them to use the federal government’s Home Guarantee Scheme coupled with a Reverse Mortgage.
The Home Guarantee Scheme allows a first home buyer to purchase a property up to a certain amount with just a 5% deposit and the federal government will pay the lenders Mortgage insurance. The caps for each capital and state’s regional area are in the graph below.
| Area | Cap & Reg Centre | 5% Deposit |
| Sydney | $ 900,000.00 | $ 45,000.00 |
| NSW Rest of State | $ 750,000.00 | $ 37,500.00 |
| Melbourne | $ 800,000.00 | $ 40,000.00 |
| VIC Rest of State | $ 650,000.00 | $ 32,500.00 |
| Brisbane | $ 700,000.00 | $ 35,000.00 |
| QLD Rest of State | $ 550,000.00 | $ 27,500.00 |
| Perth | $ 600,000.00 | $ 30,000.00 |
| WA Rest of State | $ 450,000.00 | $ 22,500.00 |
| Adelaide | $ 600,000.00 | $ 30,000.00 |
| SA Rest of State | $ 450,000.00 | $ 22,500.00 |
| Hobart | $ 600,000.00 | $ 30,000.00 |
| TAS Rest of State | $ 450,000.00 | $ 22,500.00 |
| ACT | $ 750,000.00 | $ 37,500.00 |
| NT | $ 600,000.00 | $ 30,000.00 |
Property Price Caps | Housing Australia
With a Reverse Mortgage, a parent or grandparent can provide the five per cent deposit. Based on the current property price averages in Australia the 5% deposit for the first home buyer is a tiny amount of the total value of the Reverse Mortgage security property. Below is a graph on the major cities in Australia, the average property prices, and the percentage of the property value needed for the first Home Guarantee Scheme.
| State | Median Value | % of Property Val | Deposit Needed |
| Sydney | $ 1,125,533.00 | 3.99% | $45,000.00 |
| Melbourne | $ 779,914.00 | 5.13% | $40,000.00 |
| Brisbane | $ 779,270.00 | 4.49% | $35,000.00 |
| Adelaide | $ 704,367.00 | 4.26% | $30,000.00 |
| Perth | $ 646,520.00 | 4.64% | $30,000.00 |
| Hobart | $ 656,568.00 | 4.57% | $30,000.00 |
| Darwin | $ 496,792.00 | 6.04% | $30,000.00 |
| Canberra | $ 842,677.00 | 4.45% | $37,500.00 |
https://propertyupdate.com.au/the-latest-median-property-prices-in-australias-major-cities/
Historically, in Australia property goes up by an average of 6% per annum, but often this is more. So whilst the parent or grandparents’ house is going up by 6% of the total value of the property which based on the average house price in Sydney is $1,125,553 making the equity increase of the property $67,531.00. At the current Reverse Mortgage average interest rate of 9% the interest on the loan the loan interest is only $4,050.00 for a property in Sydney. Furthermore, the child or grandchild who has been assisted in the purchase is now getting capital gains of around $54,000.00 on their newly purchased property and is saving an average of $30,000 per year on rent.
There are many ways to then payout the reverse mortgage if desired. If the parent or grandparent wants they can repay the reverse mortgage themselves through voluntary repayment. When the child has acquired enough equity in their property they can then refinance and potentially pay out the reverse mortgage. Or they can just pay out the reverse mortgage when they inherit the reverse mortgage property. For a loan of $45,000.00 a property values at $1,125,533.00 after 15 years if there is no repayments the balance is $171,351.00, but if the property only goes up by 3% p.a. the house is now worth $1,753,544.00 leaving the family over $450,000 better off.
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