PART 5
HOUSING – THE BUILDING BLOCK FOR WEALTH CREATION
Chapter 1
Using your home to fund your retirement As highlighted earlier, owning one’s own home not only significantly reduces one’s income requirement after retirement but may also provide a source of income after retirement.
Reverse mortgages Reverse mortgages have been used in the US, Australia and the UK for many years and are also available in South Africa. A reverse mortgage allows you to borrow money against the value of your home. The loan required must be paid back on death or if the property is sold by the owner before death. Reverse mortgages allow retired home owners to access the accumulated value in their property without moving. Depending on the nature of the product, this could enable them to supplement their retirement income throughout their retirement or for a defined period of time. However, as the loan against the value of property attracts interest, the amount to be paid by the estate of the borrower may exceed the value of the property if the property loses value over the period of the loan.
Research in the US has revealed that reverse mortgage take-up is also affected by the bequest motive of consumers, which is one of the reasons limiting the take-up in that market. Home owners who would like to leave their homes to their children feel reluctant to borrow against their homes as this means the banks could ultimately own the homes if these loans aren’t paid back before they pass away. In South Africa, the bequest motive has been suggested as one of the reasons for the high take-up of living annuities as opposed to life annuities. This may mitigate against the takeup of reverse mortgages in the South African market, a situation that might be overcome if the purchase of a home were made easier.
Renting out a portion of the house Retirees could rent out a portion of the house and thereby earn rental income from their homes. There are different types of accommodation that can be provided, including renting out a separate flatlet on the property, separating a part of the house for rent or renting out a room in the house. Each of these has different advantages and disadvantages in terms of a retiree’s personal life and privacy.
Owning one’s own home not only significantly reduces one’s income requirement after retirement but may also provide a source of income after retirement.
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