REVERSE mortgages and other forms of home equity release are the darlings of ivory tower economists and even the odd ‘consumer advocate’.
Fractional investing is the newest kid on the home equity release block.
Fractional investing turns your house into a parcel of shares. In fractional investing some of those shares are sold to investors. You continue to live in your house and can’t be kicked out even if you owe more than it’s worth.
You pay rent to the investors, just like companies pay dividends. These dividends come out of the value of your house.
To get $100,000, you sell shares worth enough to pay a minimum annual service fee of 4.4 per cent of $100,000 five years in advance plus a $700 establishment fee. This means you owe just short of $125,000 right from the start. This service fee pays (1) a fee to DomaCom, the company that runs this fractional investing scheme, (2) rent to the investors, and (3) investors’ share of repair and maintenance costs.
But 4.4 per cent is the minimum service fee. It goes up with your age and other things, like the state of repair of your house. You will also need to get (mandatory) financial advice, which will also set you back.
Because (1) the service fee payment is in advance; (2) you pay an establishment fee and financial advice fee, you pay an effective rate of an estimated 5.5 per cent.
In fractional investing, investors eventually also share in the capital gain (or loss) made on the eventual sale of your house.
Assuming a capital gain will be made, this means that the effective service rate you are paying in fractional investing is much higher.
Let’s say your house goes up 25 per cent in value over the first five years, the investors get an additional $25,000
That means they’re getting an additional 5 per cent annual return on their investment.
This would raise the effective minimum rate you are paying to over 10 per cent! That makes reverse mortgages sound like give-aways. The typical current interest rate for a reverse mortgage is just over 6 per cent. Centrelink’s pension loans scheme’s rate is 5.25 per cent.
Also, even though you can’t be kicked out of your home if you owe more than your home is worth, your debt will keep on climbing in those circumstances. That excess will typically be recovered from your estate.
Avoid DomaCom and fractional investing. Stick with the Centrelink Pension Loans scheme if you really need the money.
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