Reverse Mortgage (Financial Planning)

Elizabeth is divorced. She is aged 68 and lives alone. Elizabeth requires $60,000 to renovate her kitchen and

bathroom and to undertake some additional repairs on her home. She does not want to leave her home for at least
the next 10 years.
Elizabeth’s home is valued at $650,000. The only other funds she has available are a $10,000 term
deposit with her bank and 400 shares In Telstra valued at about $1200. She has no other funds to draw on to
enable her to do the work in her house as she relies on the full amount of the age pension for her normal living
expenses. Hence, Elizabeth is considering whether a reverse mortgage may be the answer to her problem. She
understands that if she obtains $60,000 as a reverse mortgage against her home that the interest rate would be
8.5% p.a.
Elizabeth seeks advice from a reverse mortgage provider and is given a number of documents to consider.
Elizabeth is required to seek legal advice from a solicitor and also advice from a financial adviser before she
can proceed with her application
Questionas:
1) Calculate the debt that Elizabeth would accumulate over the planned 10-year period
2) Calculate the estimated growth in the value of Elizabeth’s home if the property market is estimated to
increase in value at the rate of 7% p.a.
3) Explain to Elizabeth the consequence of entering into a reverse mortgage in terms of the debt to be paid
to the reverse mortgage provider and how much she would have left when she may sell her home in order to buy a
smaller home in ten years’ time or so
4) Why do you think it is a requirement for a person seeking a reverse mortgage to consult with both a
solicitor and a financial adviser before making an application?

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