Photo: RNZ
Tapping into your home's equity to fund your retirement might not be popular with children hoping for an inheritance - but it could be a way for some retirees to supplement their pension by as much as 50 percent, the Retirement Commission says.
Te Ara Ahunga Ora Retirement Commission commissioned Motu Research to look at home equity release schemes provide value for money and how they might provide a suitable form of retirement income for some people.
The research showed that for about 25 percent of older households who have low retirement income and savings, but high levels of equity in their home, equity release products could be a better option than turning to personal loans or credit cards.
In 2021, the average net worth of retiree households was $1.143 million, of which home equity was $400,000. The upper quartile had $650,000 in home equity.
Forty percent of people aged 65 and over had virtually no income other than NZ Super and another 20 percent had only a little more.
How it works
At present, there are two main ways that people can release the equity in their homes without selling them.
Heartland and SBS offer equity release loans, also known as reverse mortgages.
People using these borrow an amount of money against the equity in their homes. The amount that can be borrowed as a percentage of a home's equity increases as borrowers get older, from 15 percent or 20 percent at 60 up to an initial loan amount of 50 percent for people who are 90.
They do not make any payments until the house is sold. Interest rates are usually floating and are currently 10.5 percent at Heartland Bank and 9.95 percent at SBS.
Because no repayments are being made and interest compounds, the amount that is owed can increase substantially.
Some products have options that allow homeowners to "ringfence" a portion of their equity to ensure that the entire amount is not wiped out by the loan.
The other, newer option, allows people to sell a share of their home in return for income.
People sell a 35 percent stake, which builds at a rate of 3.5 percent a year for 10 years, in their home to Lifetime Home in return for 25 percent of the initial value of the home, paid in fortnightly or monthly payments.
This means that the homeowner receives an annual income of 2.5 percent of the current value of their home (less fees and charges) for 10 years. When the regular payments stop after 10 years, the homeowner retains 65 percent ownership of their home while Lifetime obtains the other 35 percent. If they remain in their home after that time they pay a fee of $1000 a year. Further equity can also be released.
Who does it suit?
Te Ara Ahunga Ora Retirement Commission policy lead Michelle Reyers said while New Zealand home equity release products appear to be costlier than in larger markets, they could provide an alternative source of income less costly than other types of borrowing.
"The key to using home equity release products is understanding the costs and benefits and seeking financial advice to see if they are right for you," she said.
She said people taking a reverse mortgage would be better off to withdraw a series of small amounts, rather than a lump sum. This would slow the rate at which interest accumulated.
It would also make sense for people to explore these options when they were a little older, perhaps 70 or 75, Reyers said.
"Perhaps you have a bit of KiwiSaver, you work for a few years after 65 and by the time you get to 70 it makes sense to start using these products.
"For the group of retirees relying primarily on New Zealand Super for income who have home equity but no other assets to draw down, it is something to consider."
She said her modelling showed people with $600,000 in home equity could draw down $1000 a month for 10 years from age 75 to 85 to supplement their superannuation income by 30 percent to 50 percent and still have a "fair amount" of equity left at the end of 10 years.
Think of the children...
She said these options would result in people being able to pass on less of an asset to their children.
"A lot of people want to leave a house to their children and for those people a reverse mortgage is perhaps not the right answer. but for other people they may have supported their children through their working lives, to get into a home - they've already done that before they reach retirement so the children are happy they draw it down and live a comfortable life. It depends on the individual and their circumstances."
Economist Shamubeel Eaqub said it could be a question of trading off a parent's poverty for an inheritance. "It's a hard one to sell - somehow it's okay for your elderly parents to live in poverty and own their own home 100 percent just so you don't lose your inheritance. That's a huge moral dilemma.
"For some people who are asset rich and cash poor this is a really useful tool when they don't have any other savings... there is a place for it. If we had more competition it would be cheaper, more affordable, less burdensome than they are currently. But no country has really cracked it as far as I can see."
It was a product for a specific problem that would not make sense to be part of retirement planning in general, he said.