A house can't buy your groceries or mend its own roof. But reverse mortgages can turn some older homeowners’ bricks and mortar into dollars. Here’s what you need to know about reverse mortgages - including the fish hooks.
When people hit 65 they can still have 25 or 30 years of living to fund, thanks to increased life expectancies. A high proportion (60 percent) of those aged 65 and over depend entirely or largely on NZ Superannuation for their income. As a result, money can be tight – especially when unexpected expenses come up.
Enter reverse mortgages
A reverse mortgage or “home equity release” (HER) lets you borrow funds using your home as security. This means you can free up part of the value of your house without having to sell it. The lender gets their money back (plus interest) when your house is sold – which is usually when you go into full-time care or you die, or the last person named on the reverse mortgage document permanently leaves the property.
The reverse-mortgage market hasn’t changed much since we last looked at it in 2012, although it’s now dominated by banks (see our table). The fallout from the global financial crisis made it difficult for non-banks to find funds – and one of our 2012 reverse-mortgage providers, Sentinel, stopped lending to new customers.
In April 2014, Heartland Bank bought Sentinel and it’s now marketing reverse mortgages under its own name. ASB still offers its Homeplus product and SBS Bank continues to offer its Advance Loan.
TSB Bank has introduced a reverse mortgage called Lifestyle Equity Loan. However, it doesn’t have the lifetime occupancy or “no negative equity” protections that other reverse mortgages have (see “TSB Lifestyle Equity Loan”).
According to the Deloitte Australia report, the total value of the New Zealand reverse mortgage market is similar to the pre-global financial crisis period. But the number of mortgages has been decreasing while the average loan size has increased. In December 2008 there were 6878 reverse mortgages and the average loan size was $62,516. As at December 2013 there were 5338 with an average loan size of $83,229.
In 2008 the Ministry of Social Development (MSD) developed a code of standards for reverse mortgages. The code is voluntary and not legally binding. Its standards include:
- lifetime occupancy
- “no negative equity”
- clear explanations of the conditions, charges, costs and responsibilities
- clear explanations of the benefits to the lender and to any adviser who promotes the reverse mortgage
- clear information on the loan conditions and its total cost
- independent legal advice before you sign up
- access to an independent complaints process.
A calculated risk
Reverse mortgages benefit you when property prices are rising and interest rates are relatively low. When the reverse happens, the value of your equity can be rapidly reduced.
With help from Commission for Financial Literacy and Retirement Income, we’ve come up with two hypothetical examples that show how equity can be affected by interest rates and house-price inflation. (The houses in these examples do not fall into negative equity at the end of the loans.)
Lenders charge a higher interest rate for their reverse-mortgage loans because they wait a long and uncertain period for repayment (most lenders get no repayments during the life of the loan). The higher rate is the “premium” for having uncertainty about when the loan will be repaid.
Heartland Bank says it aims to keep its rate 1.5 to 2 percent above the major banks’ floating rates.
SBS is the only provider to offer fixed (for terms of three and five years) as well as floating interest rates. When the “fixed” term ends, you can re-fix – but there’s a fee of $100 for doing this.
- Reverse mortgages are not ideal for everyone or every situation. Carefully consider what you need the money for – and how long you intend to stay in that particular house. You could be better off looking at other options.
- If you have a family, discuss the idea with them before you make a decision. Again, there may be other options.
- Get independent legal advice.
- Make sure the reverse mortgage offers lifetime occupancy, “no negative equity” and loan repayment guarantees.
- If you’re a couple, make sure both your names are on the loan document.