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Pops Reverse Mortgage - What to do?

Discussion in 'Accounting & Tax' started by albanga, 25th Mar, 2016.

  1. albanga

    albanga Well-Known Member

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    Apologies in advance if this becomes a long post or if it's in the wrong section, thought it would be most relevant here:

    Situation:
    - Pop has a reverse mortgage on his property to the tune of about 150k and growing. I would estimate the properties value around 350k-400k.
    - Pop has no savings and lives off his pension.
    - Mum is an only child and the home will be left to her but pop is fearing at this rate he will have nothing to leave her.
    - Mum is also on a carer pension for pop, has some savings invested into a share investment folio and also recieves rental assistance as she recently sold her home to live a more comfortable life.
    - There are 3 of us kids, 2 can service debt whilst the other has a bad credit file.

    So that is the background and I have just started to think is there anyway to get pop out of this and create a win/win/win for all effected.

    My initial thought has been could pop sell the home to me or the kids as tenants in common at the cost of the current mortgage (150k). This would be way under market value and I understand stamp duty would still be charged at market value.
    By doing so pop would then basically lose that asset and become homeless which would then result in potentially an increase in his pension and also recievel of rental assistance. On I/O at 5% the repayments would only be $625 which pop May recieve as an increase to his pension and rent assistance?

    Pop could then pay that as "rent" basically making the property totally neutral.

    So the end result from my very limited understanding and likely have not considered a whole bunch of issues (and note my objective would never be to do something dodgey to recieve increased centrelink) would be:
    - No change to pops expenses. He would still have the same amount to live on.
    - The bank is no longer taking his home day by day
    - No cashflow effect to me/us for purchasing it, although we would take a servicing hit
    - Protection of mums inheritance without changing her current lifestyle.

    The part I have not thought a heap about yet is what will happen to the property when it would normally have passed to mum. I have some ideas most notably I could develop it but that requires more consideration.

    Would love to hear some feedback.
     
  2. Hodor

    Hodor Well-Known Member

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    He may have less as he would no longer have the amount he was drawing from the reverse mortgage even if his pension increases to the tune of the rent.

    Good that you are trying to get on top of this before it gets out of hand. The above would be my only query as pop deserves to enjoy himself as fully as possible.

    Is mum just looking to live in the house (her inheritence) long term?

    No easy solution I can see. I wonder if there is a way to set things up so mum and pop can live in the house and then it passes to the kids that have funded it.

    Could paying him a market rate (or near to) give a better outcome? He could put the money into an income stream (shares, term deposit or whatever) to replace the money he was getting from the reverse mortgage. You would have to work out where asset means testing and increases in rent vs pension meet. Just thought I would throw that idea out there anyway for discussion, sure there are plenty of holes in it.
     
  3. albanga

    albanga Well-Known Member

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    Hey @Hodor thanks for the quick detailed reply.

    His 150k is full drawn meaning he no longer draws from this. He could Increase the limit for cashflow but that would just worsen the issue.

    I forgot to note that mum and pop are both quite independent and apart from this stress for my pop, quite happy in there seperate homes. Mum sold early last year and moved into a beautiful little rental and I've never seen her happier. Since nan passed and pop has now settled he wants to stay in the home. I would say if/when that time comes that pop is no longer independent that he would move in with mum.

    The buying at market and allowing pop to stay would definitely help him but unfortunately I/We would be worse off because we would have a decent mortgage and would not want to charge him market rent. The result would be a large negative cashflow.
     
  4. Peter Stewart

    Peter Stewart New Member

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  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    For pension perposes he would be gifting money if he transferred the property for under market value. The gift would be considered his asset for 5 years and he would be deemed to be receiving a certain amount of interest on it too. So for 5 years the house would be an asset and he would be earning income - actually worse off.

    What about you or your mum pay off his loan. If that is not possible you could meet the repayments so it is not increasing. This could be done as a loan.

    It would be far better to inherit a property than have it transferred now for consideration. There is no stamp duty on the transfer after death and there are many tax benefits and asset protection benefits too.

    Is it a pre 1985 property? If so it would be always free of CGT as well.
     
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  6. Simon Moore

    Simon Moore Mortgage Broker - Melbourne Business Member

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    My grandma gave one of my aunties a 'gift' of about $150k because she has health issues. This actually reduced her centerlink payment for a period (five years from memory).

    Might want to be careful the sale is not seen as a 'gift' and results in a reduced pension.
     
  7. Peter Stewart

    Peter Stewart New Member

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    There are some details missing, such as how old are Pop and Mum, what is his current rate of interest on the reverse mortgage, and what postcode is Pop located.
    In selling his house at a reduced value, not only are their stamp duty considerations, Centrelink would look at the reduced price and consider the gifting provisions and deeming, which would be included in Pop's assessment for the next 5 years.
    I feel the longer term problem is that Mum is now a renter. With Pop's inheritance, could she buy a home later on, or would her savings, plus inheritance, plus reverse mortgage, be required for a purchase
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    What if the recipent of the gift dies before Pop - the house will pass via that person's will or intestacy laws. What if there are Family Provision claims by ex spouses, dependants etc.

    What if the gift recipient ends up bankrupt or dies and the house is passed on the that person becomes bankrupt.

    Tax considerations too - if the recipient rents it out the interest on any loan used to acquire it would be deductible. If it was a gift none would be deductible. If it was part gift and part paid for then only part of the interest deductible.

    Also conisder the granny flat rules. Pop could give his property away and remain there under a life interest without the pension being effected. It would still be considered his main residence if he has a life interest - with many complex rules attached.
     
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  9. Xenia

    Xenia Adelaide Property Manager Business Member

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    Pop is your grandfather? Your mums father? Sorry trying to understand the scenario.

    Depending on the restrictions of the reverse mortgage, you can have your grandfather living with yourself or your mum and rent the house out so that the rent pays down the mortgage.

    Need to also consider implications on pensions etc....

    We are currently managing a property where grandmother lives with daughter and house is rented. I have no idea on what they worked out in the background, pensions, etc but they have told me it is a strategy to decrease the debt on reverse mortgage so that more is left to family as an inheritance.
     
  10. wylie

    wylie Moderator Staff Member

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    I've just realised pop is your mother's father. I was thinking it was your father but it is your grandfather?

    Assuming all three of you will inherit from your mother, could you each provide $50K to clear the reverse mortgage? That would stop that debt growing. Interest only that is less than $50 per week each. Could your mother tip in, if it would not reduce her quality of life?

    Or could he sell and your mother and your grandfather buy or rent somewhere with a granny flat arrangement so that she can still care for him without him losing his independence completely. How old are they now?
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Pop receiving gifts would possibly reduce his pension.
     
  12. albanga

    albanga Well-Known Member

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    Hey All,
    Wow what a response, definitely has the PC group thinking.

    Just to answer some questions.
    Sorry pop is mums dad so my grandfather.
    Pop is I think 85 and mum is 64. Pop is still kicking goals though, he still drives but he is limited on bending so that's why mum cares for him and does washing, cleaning.etc

    The reverse mortgage IR I would need to check, from memory last time it was close to 6% so a bit higher than standard IR but not personal loan heights.

    As I mentioned before an arrangement where mum and pop would live with each other at this time is not really something they are both keen on. They both want there independence still and have discussed this at length.

    The house is definitely pre1985, think pop bought and moved into it back in the 50s.

    The one upside has been it has seen a little growth in the past 2 years with the Melbourne boom, it's North West (Jacana) so from the time he took the mortgage to now it would not have changed much in terms of equity.
     
  13. sanj

    sanj Well-Known Member

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    why not keep it simple? what sort of money was he drawing weekly from the reverse mortgage? I assume not a huge amount.

    with there being 3 grandkids, 3 of you could just chip in each week and give him the cash instead to live on, you'd be helping him and ultimately your mum too. if possible I've found doing a bit in advance in lump sums gives them a bit more comfort/piece of mind.


    no need for convoluted schemes, keep it simple imo. no idea about how this affects centre link bUT since it's a gift or a loan I think you'd be fine. you'd want to check whether a gift or loan is more appropriate with regards to centre link payments not being affected
     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Sounds like you want him to sell because you are worried that the reverse mortgage will eat up the inheritance. This would be occuring because of capitalised interest.

    So as Sanj suggests the easiest and simplest way is to chip in and pay the interest and maybe capital. This could be done as a loan (0%) or a gift, but watch out for the centrelink issues.
    Seek specific advice on this.

    Also keep in mind any transfer now would remove the CGT exemption status. Say pop went into a home, he could rent it out for the next 20 years and it would always be exempt from CGT.
    If you transfer it now and he rented it back it would then be subject to CGT when sold. A CGT free asset is very valuable.
     
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  15. sanj

    sanj Well-Known Member

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    agreed, #1 priority should be ensuring his retirement is a comfortable one, #2, assuming #1 has been sorted is mums inheritance although granted the 2 could be linked if it is worrying him that there may be nothing left to pass to her. everything and everyone else is irrelevant realistically. whatever is left after the above 2 is done is left. with 3 grandkids, assuming you're working and with your folks
    you've got 5 adults there. I'm sure finding say 500/wk between the 5 adults isn't going to break the bank, even if it means some pitching in more than others.

    keep it simple imo, no need to overcomplicate
     
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  16. Peter Stewart

    Peter Stewart New Member

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  17. Peter Stewart

    Peter Stewart New Member

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    Thank you for the additional information.
    Let's say Pop can stay living independently for the next 5 years. His debt would then be 50% of his property value (let's say current worth is $375k, with an average interest rate of 7.5%). He would then have about 215k if he was unable to remain independent and need residential care. As his assets are greater than $159k he would be asked to contribute to both his care and accommodation costs. A decision would then be needed whether to sell his home or rent it ( new rules disadvantage home owners renting the former home - means testing now includes rent - age pension will include rent Jan 2017, if it passes Parliament).
    You may wish to have Pop assessed by ACAS as to his capacity to live independently and what services he needs ( may be level 1 or 2 subsidised care).
    While Pop still lives independently with a Reverse Mortgage, making repayments will assist. Anyone making payments will need to understand his assets may be required to contribute to his care and accommodation costs done the track, and therefore reduce his future estate.
     
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