Johannesburg - Hundreds of families face an uncertain future after falling for scams involving supposed reverse mortgages. But for a small group of the population, legitimate reverse mortgages may offer hope.
Reverse mortgages involve taking a big loan with your house as security. The bank usually pays you a tax free amount, which is then subtracted (with accumulated interest) from the value of your house when it is sold.
Reverse mortgages are popular overseas because they offer pensioners hard cash, while they can stay on in their house.
Usually the reverse mortgage is only paid back when the house is sold or when the owner and spouse have both died. If the amount owed on the house is more than the value of the house, it has to be written off in terms of the requirements of the SA Home Equity Release Protection Association (Saherpa), a consumer protection organisation. The owner's estate can't be liable for the shortfall.
A reverse mortgage can potentially be a legitimate option, says Jan Augustyn, head of investigations at the National Credit Regulators.
However, these products are earning a bad reputation following recent scams. Many home owners face losing their properties after being duped by scammers.
While these firms were selling products marketed as reverse mortgages, they were in fact far from it, says Augustyn.
In the recent case of Brusson Finance, home owners in effect signed over their houses in exchange for small loans – and then ended up having to fork out expensive monthly payments to remain in their homes. In the end they could not afford these payments and were evicted.
In 2007, 400 older people were affected after Pretoria-based Reverse Mortgage Company was placed in liquidation.
Augustyn says more companies are involved in reverse mortgage type scams and investigations are continuing.
Is your house in the balance? The first thing you should do is discuss it with your bank, says Augustyn. Banks are well aware of the financial pressures facing clients and may allow you to renegotiate repayments.
If the bank does not accommodate you, apply with an accredited debt counsellor. If you are considered for the debt review process, you will get some relief from your creditors for a time.
But sometimes it may be best to give up your property, Augustyn said. Many people are so indebted that they can't possibly rehabilitate themselves without giving up some of their assets.
However, this may depend on the state of the property market. If you end up making a huge loss, selling your house should not be an option.
Struggling with massive debts can be an overwhelming experience and make people vulnerable to preying scamsters, he added.
"If it's too good to be true, it probably is."
While it is important that any credit provider you deal with is accredited with the NCR, that does not necessarily mean that the organisation is following the law, he warned.
Recently, NCR-accredited group Asset Management Specialists was exposed for reverse mortgage fraud.
Should you consider a reverse mortgage? Paul Rosenbrock, a director of the SA Association of Retired Persons (SAARP), warns that reverse mortgages are only suitable for a small group of older people - ideally substantially older than 65, "who are property rich and cash flow poor".
While he think these products may be potentially dangerous, in the right hands they can play an important role to help people who are struggling to survive in their later years.
Many, particularly those saddled with huge medical bills, think they can sell their property to help their financial position. But that can be uneconomical, says Rosenbrock.
The cost of selling a house of R1m can run up to R250 000 if estate agent commission, the cost of the move, transfer fees, bond registration costs and other charges are considered, he reckons.
The big advantage of reverse mortgages is that the struggling pensioner will get a cash injection, which can be used to buy a life annuity with a monthly payout or settle urgent medical bills.
Option of last resort But the drawbacks are significant, and it should be regarded as a loan of last resort. Interest is usually about 2% above the prime rate and the costs - which can include mortgage registration and professional property valuation fees - are substantial. There is also very little regulation governing the products.
While reverse mortgages were first launched some 90 years ago in the US and are established in many countries, the concept has not gained much traction in SA.
The big banks have reportedly considered reverse mortgages, but only
Nedbank Group [JSE:NED] initially introduced a product to the market which they ultimately decided to withdraw.
While a number of smaller institutions are offering reverse mortgages, only Seniors' Finance, owned by Alexander Forbes and the New Zealand-based Seniors Money International, is accredited by Saherpa. It is understood that, while existing clients are being serviced, the Alexander Forbes venture is not being marketed actively at the moment.
- Fin24.com