Reverse mortgages are booming, with older New Zealanders tapping into their homes for extra cash.
New Zealanders who reach retirement mortgage-free, but also savings-poor, can dip into their equity with a reverse mortgage.
Reverse mortgages allow homeowners aged over 60 to withdraw up to 50% of their home’s value as a loan. That money can be to supplement their NZ Superannuation and improve their standard of living, pay for essential operations, or fund the retirement of their dreams – such as covering the cost of a boat or a round-the-world holiday.
Reverse mortgages are growing in popularity, with research by EY in 2020 predicting that the global market for equity release would triple by 2031.
Start your property search
Heartland Bank’s general manager of retail and reverse mortgages Keira Billot says new business increased 17.6% in the second half of the bank’s 2022 financial year. “A reverse mortgage is a great option for some over 60-year-olds, to relieve their financial pressure and live a more comfortable retirement,” she says.
Read more:
- How real estate’s rich listers got richer: Streetwise sellers who beat the slump
- Massive rate hike 'not justified': Experts urge Reserve Bank to back off
- ‘Long-standing battle’ to get bank-shy borrowers to apply for loans easing
To qualify, borrowers must be aged over 60 and their home must be mortgage-free and well maintained. The older the borrowers are, the more they can borrow. At Heartland Bank, a 60-year-old can borrow up to 20% of the home’s value, but that gradually increases to 30% at age 70, 40% at age 80 and 50% at age 90.
The limits protect from the loan growing to more than the home is worth, and homeowners may choose to pay extra for an “equity protection” option, which protects a percentage of the eventual net sale proceeds of the home. That ensures their beneficiaries receive some inheritance.
As well as age thresholds, there are often minimum property values. At SBS Bank the minimum values are $750,000 for Auckland and $600,000 for much of the rest of New Zealand.
Homeowners who qualify can receive the money as a lump sum, in instalments. Sometimes they draw some of the money, but leave the rest of the loan for a surviving partner, should one die. There are no repayments to make until the last member of the couple moves out.
It all adds up
Interest is charged on the loan, but the repayments are added to the outstanding balance. That means no repayments. However the amount owed to the bank grows steadily over time.
The rates on reverse equity mortgages are higher than regular home loans because the bank may not receive any return on that money for decades.
An increasing number of homeowners in New Zealand are using reserve mortgages. Photo / Fiona Goodall
A reverse mortgage loan is repaid when the last “nominated resident” moves out, dies, or the home is sold. It’s at that point that the bank takes the interest that has been adding up on the loan.
Homeowners should always get legal advice before taking out a reverse mortgage to avoid any unexpected consequences. It may be a good idea to discuss the move with family so that they are aware, because some offspring covet their parents’ assets.
What are reverse mortgages good for?
Homeowners use withdrawals from reverse mortgages for a variety of purposes. Some simply want a regular top up to their NZ Super. Some use the loans for unexpected expenses such as new roofs, and cars, or operations that they couldn’t otherwise afford.
Financial adviser Maurice Mehlhopt who specialises in retirement funding, says he had one client who used the money to fund a heart operation. “The couple had cancelled their Southern Cross policy five years previously and only had the pension to live on.” The client protested that her children deserved an inheritance, but her husband convinced her that her health was more important. “The surgeon told her after the operation that he was not sure she would have lasted [without the operation],” says Mehlhopt.
Billot says that people sometimes use reverse mortgages to pay off outstanding home loans or other debt. “According to credit reporting bureau Centrix, the number of mortgage holders aged 65 and over increased by 17.2% between 2017 and 2022, with nearly one in five Kiwi pensioners still managing a mortgage into retirement.
“This data mirrors the experience at Heartland over the last 15 years, where we have seen a 55% increase in the proportion of reverse mortgages being used to repay debt.”
Reverse mortgages – pros and cons
The pros
● Homeowners can access the capital in retirement without selling the home.
● It’s a good way to get money for big ticket purchases such as buying a new car or roof. It allows people to age in place in their home, rather than having to move when they don’t want to.
● The homeowner benefits from house price growth, which isn’t often the case in retirement villages.
● The homeowners retain legal ownership.
The cons:
● It’s expensive. Interest rates are higher than regular mortgage rates. In February 2022 both Heartland Bank and SBS Bank reverse mortgage rates were 8.5%.
● The interest compounds, which means it can eat up a bigger proportion of the home’s value than the initial sum borrowed.
● A range of fees are added to the loan such as application fees, valuation fees, draw down fees and discharge fees.
● Interest rates are variable, which means they rise and fall according to economic conditions. They can’t be locked in. Like all other mortgages the rates have doubled over the past 18 months, which means the value of the home is being eaten up much faster than in the past.
● Owners can’t usually rent out their home and go travelling. The home must be sold as soon as the owner moves out.
Alternatives for ageing homeowners who own a home, but live on NZ Super alone include renting out a room, or selling and downsizing to release equity.
Some families come up with alternative ways to finance parents’ lifestyles without getting an expensive reverse mortgage. That can include adult children buying a portion of their parents’ house, to release equity. Or sometimes they move in and pay rent. Anyone entering this sort of arrangement should take good legal advice, to avoid family squabbles after the parents die.
