Mary Holm talks about reverse mortgages, which are seen as a way to free up money for retired homeowners, but she warns people should take care if they're considering this.
She explains there's been growing interest in these mortgages, with Heartland bank recording 39 percent increase in inquiries for the first quarter of this year compared with the same period in 2020. Reverse mortgages are only currently offered by Heartland and SBS.
This is a financial tool for the asset rich cash poor person, she says.
Photo: RNZ / Cole Eastham-Farrelly
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“People say I'm asset rich and cash poor. And as I said with house prices, where they are now that's really a common situation.”
Reverse mortgages are a good way of releasing equity in your home to supplement retirement income, she says.
She recommends that it is a strategy for older retired people, not those in their early 60s.
“You can get them from age 60 on, but as I say I reckon it’s much better to spend all your savings and do whatever else you can to provide money for yourself until you're sort of 85 or 90, preferably.
“One exception to that would be people who have got big health problems and saying, Well, I'm not going to be alive at that stage in my life.”
They work by borrowing a sum, typically 15 percent of the house value, but you do not need to pay it back until the house is sold.
“Which sounds all quite nice, except that in the meantime, the interest on the loan is compounding. And that's why I don't like seeing people who are relatively young, 60 to 70, using it.
“I've heard of people in that sort of age group, saying this is great, I can borrow money and do all kinds of things. And I think be a bit careful, just be aware what you’re getting into because they’re floating rate loans.”
Historically very low at the moment, interest rates are likely to go up, she says. And reverse mortgage rates are higher than other mortgages anyway - around the high 5 percent mark.
Once you have the loan, you can take it as a lump sum or as a weekly payment to top up your super, she says.
“And you can spend that money on whatever you want to, the bank is not interested in how you spend the money, their security is your house.
“You can blow it all on a big party if you want to!”
At 60 you may be able to borrow 15 percent of the property value, at 80 or older up to half, she says. But beware the payments on the loan are compounding.
“If you've got the loan running for 20 years, so you borrow at 65 and die or move out of the house at 85. Then the amount you borrow, if the interest rate is 7 percent, it could be about four times what you originally borrowed.
“And if the interest rate goes up to 9 percent, it could be six times what you originally borrowed. So, you're going out and borrowing $100,000 and owing $600,000 after 20 years. After 30 years it's even worse if the interest rates have gone up to 9 percent for most of that period, you could be owing 15 times what you borrowed, you borrowed $100,000 and you owe $1.5 million.”
Most lenders cap the loan so that you do not ending up owing more than the property can realise when sold, she says.
The compounding of the loan is offset to a degree by the house increasing in value, she says. Historically houses have gone up 3 percent a year in New Zealand.
You can also build in equity protection, she says.
“With quite a lot of these loans you can say I want to make sure I’m left with at least $200,000 when I die, or sell the house, perhaps move into a home or whatever. Because I want the kids to get something.”
Before taking on a reverse mortgage, she says a chat with the children is a good idea.
“And as I said before about these kinds of things, I think if they say, ‘hey, you can't do that’. That's a good sign that you can do it and should do it! Because it’s your money actually.”
The Commission for Financial Capabilities has a list of key things to ask, Mary says.
- Do you have the right to live there for life.
- What if you move? Can you transfer the loan to your new place?
- And you want to guarantee that you won't pay more than the proceeds from selling the property.
Mary’s three final points to remember are:
Only borrow as much as you need.
“Don't go and say it'd be nice to have $50,000 sitting there in the bank to use when I want it. Because that money is sitting in the bank earning 1 percent or something and you're paying that 6 percent on it.
Think about whether you want to tell your family.
“I would recommend that you do. Tell them what you're doing.”
And finally it’s a good backup for very old age.
“Once you're 85 or 90 but please be wary about doing it at 65 or 70. Because it can just add up to so much more than what you actually borrowed.”
It’s buyer beware, she says.
“Don't rely on the bank to say, hey, I don’t know that you want to borrow that much.”