HIR Program Vs Reverse Mortgage
A Reverse Mortgage charges a higher interest rate on the principal loan amount and if interest payments are not made, the interest compounds against the principal loan amount causing the debt amount to increase over time.
When the loan is eventually repaid, the compounding interest can result in a significant depletion of homeowner equity due to the increased debt amount. This is reflected in the compulsory and legal inclusion of a ‘No Negative Equity Guarantee’ for all interest-based reverse mortgage products. This essentially means that you can never owe the Lender any more than the value of your home. But without question, the real risk of a reverse mortgage clearly resides in a changing economic environment in which interest rates start to rise.
A Home Reversion product involves the ‘open’ sale of a piece of equity in your home. Lender risk is brought forward by discounting the real value of your home to establish how much capital you can access from your home. Although a home reversion product negatively impacts the homeowner’s equity position from the start, it may prove useful for those homeowners who carry a high level of debt against their homes and need a lump sum to retire the debt.
A HIR Program releases interest-free capital from a home based on the ‘Loan to Valuation’ Ratio or LVR. In consideration for providing the interest free capital for purpose, the Lender is contractually assigned growth in a fixed home equity value equal to the LVR. Income is periodically drawn down in favour of the homeowner while the balance of capital is invested into approved and mandated asset classes to generate an investment return on behalf of the homeowner. The investment return is offset against the income distributed to the homeowner with the aim of preserving as much of the released capital as possible and hence, minimising the HIR loan balance. Income is delivered when it is needed in a HIR Program and there is no risk to homeownership.