Divergent views of the risk of reverse mortgages from Iceman and Balance.
Time to run through a few scenarios to allow Balance to maintain hiser cool?
Example 1: 85 year old couple take out a 40% REL loan at an 8% interest rate for ten years. House price falls 20% over first five years of loan then flatlines for the next 5 years. We will say the house is worth $1m at the start of this process to keep the numbers easier.
1/ Value of property at the end of the loan period is $800,000.
2/ Loan taken out $400,000.
3/ Interest accrued over first year: 0.08 x $400,000 = $32,000. The interest accrued over a ten year period is listed below:
Cumulative Loan Capital at Start of Year Interest Accrued over Year Year 1 $400,000 $32,000 Year 2 $432,000 $34,560 Year 3 $466,560 $37,245 Year 4 $503,805 $40,304 Year 5 $544,109 $43,529 Year 6 $587,638 $47,011 Year 7 $634,649 $50,772 Year 8 $685,421 $54,834 Year 9 $740,255 $59,220 Year 10 $799,475 $63,958 Year 11 $863,433
Loss for Heartland over loan period: $800,000 - $863,433 = $63,433
Example 2: 65 year old couple take out a 30 year 20% REL loan at an 8% interest rate for the next ten years and a 6% interest rate for the ensuing 20 years. House price falls 20% over first five years of loan then flatlines for the next 5 years, then increase by 1% per year over the subsequent 20 years. We will say the house is worth $1m at the start of this process to keep the numbers easier.
1/ Value of property at the end of the loan period is:
$800,000 x (1.01)^20 = $976,152
2/ Loan taken out $200,000.
3/ Interest accrued over first year: 0.08 x $200,000 = $16,000. The interest accrued over a thirty year period is listed below:
Cumulative Loan Capital at Start of Year Interest Accrued over Year Year 1 $200,000 $16,000 Year 2 $216,000 $17,280 Year 3 $233,280 $18,662 Year 4 $251,942 $20,155 Year 5 $272,097 $21,768 Year 6 $293.865 $23,509 Year 7 $317,374 $25,390 Year 8 $342,764 $27,421 Year 9 $370,185 $29,615 Year 10 $399,800 $31,984 Year 11 $431,784 $25,907 Year 12 $457,691 $27,461 Year 13 $485,153 $29,109 Year 14 $514.262 $30,856 Year 15 $545,118 $32.707 Year 16 $577,825 $34,670 Year 17 $612,495 $36,750 Year 18 $649,245 $38,955 Year 19 $688,200 $41,292 Year 20 $729,492 $43,770 Year 21 $773,262 $46,396 Year 22 $819,658 $49,180 Year 23 $868,838 $52,130 Year 24 $920,968 $55,258 Year 25 $976,226 $58,573 Year 26 $1,034,800 $62,088 Year 27 $1,096,888 $65,813 Year 28 $1,162,701 $69,762 Year 29 $1,232,463 $73,948 Year 30 $1,306,411 $78,385 Year 31 $1,384,756
Loss for Heartland over loan period: $976,152 - $1,384,756 = $408,604
SNOOPY