Do you have to sell family home to finance retirement?

White, 68, a retired steel company manager, needed to fund his retirement without selling the home where he had lived with his wife during their final years together.

"I had lost her – I did not want to lose our home," he says about their Federation-era house in Thagoona, a suburb of Ipswich, about 60 kilometres south-west of Brisbane.

"It contains so many of our shared memories," he says.

White's financial dilemma is increasingly shared among the ageing Baby boomer generation, which accounts for about 25 per cent of the nation's population and 55 per cent of its private wealth, according to government analysis.

His solution – taken after seeking financial advice from an accredited adviser – was a reverse mortgage, which is a loan converting part of the equity in his home into cash.

The money can be taken as a lump sum, regular income stream, line of credit or a combination of these options.

It is repaid in full – including interest and fees – upon the sale of the house, death or, in most cases, when the borrower moves into aged care.

"The extra cash allowed me to pay off my mortgage and make repairs. It allows me to live quite comfortably on the state pension," he says.

A $90,000, 20-year reverse mortgage loan at 6.6 per cent is likely to cost about $344,000, according to Canstar, a company that provides financial information.

It assumes a 15 per cent loan-to-value ratio, upfront fees of about $1000, annualised charges of $112 and a $300 discharge fee.

Ian Yates, chief executive of Council of the Ageing, which represents more than 500,000 older Australians, says retirees need to consider all aspects of life-changing financial decisions.

"Get really good financial advice," says Yates about options and potential strategies, particularly if it involves selling the family home.

"Once you sell your house, it is gone," he says. "You need to be very careful about setting the right lifestyle goals. Some people relocate to retirement villages and 12 months later are unhappy about the move," he adds.

"Also, look very closely at what it means for social security and income because this is not an easy time to be trying to generate income from non-superannuation investments."

Eligibility for the age pension depends on total value of assets, which excludes the family home and two hectares surrounding it. Home sale proceeds are exempt for 12 months, as long they are to be used to buy another home.

Interest earned on the proceeds is included in the income test.

Record low interest rates, turbulent stock markets and falling returns on investment properties make it tough to produce a comfortable income from modest lump sums, analysis of investment returns reveals.

According to the Association of Super Funds of Australia, a 65-year old couple will need about $34,000 a year to live a modest lifestyle, and about $59,000 a year for a comfortable lifestyle.

The amount required for a modest lifestyle is better then the age pension but still only provides fairly basic activities.

A comfortable lifestyle includes a broad range of leisure and recreational activities and purchase of a reasonable car, good clothes and travel.

Seniors are being encouraged by some advisers and promoters to take advantage of the recent surge in property prices to downsize into an apartment, retirement village or lifestyle estate, where residents own the house and lease the land.

To enter a retirement village, a prospective resident enters into a contract with an operator covering tenure and costs associated with moving into, residing and leaving the village.

It's comparable to a lease with a tenure agreement, initial and ongoing fees, and charges that are back-ended, or deferred, until departure. .

Lifestyle estates, which are often converted caravan parks, are an increasingly popular alternative with some providers offering several communities around the nation.

But the legal status of people in the parks is less clear than for retirement villages, according to Yates.

Tenants buy the house, which is nominally moveable, and the operator owns the land.

Security of tenure could be an issue if there is a change of owner, or bankruptcy, he says.

Andrew Cate, area manager for Seniors First, a company that specialises in reverse mortgages and equity release finance, says home sellers also need to account for sales commission, tax, lawyers' fees, relocation expenses and the emotional wear-and-tear of moving house.

"In some cases total costs, hassle and reduction in age pension because of earnings from the lump sum make some wonder whether it was worth the effort," Cate says.

Canstar surveyed 10 reverse mortgages offered by seven lenders for Smart Investor Weekend.

Bank of Melbourne, which is a division of Westpac, and Heartland Seniors Finance, an advisory group specialising in reverse mortgages, offer the best value, the survey reveals.

Performance criteria range from price and size of loan to availability of an offset account, redraw facility and combination of payments.

For example, interest costs can be dramatically reduced if the sum borrowed is taken as a line of credit over the term of the loan, rather than a lump sum at the beginning.

According to the survey, there is a 30-basis point difference between the lowest rate of 6.45 per cent and highest at 6.75 per cent.

Total costs for a $90,000 loan will be about $176,000 for 10 years and more than $650,000 for 30 years. It assumes an interest rate of 6.6 per cent and fees being capitalised and repaid at the end of the loan term.

Reverse mortgages are about 100 basis points more expensive than a standard residential variable loan.

Alternatives to selling a house, or a reverse mortgage, include converting a house to dual occupancy and selling or letting half the house.

Home owners can also rent out rooms, which has tax implications and may offset the age pension.

Originally published by the Australian Financial Review