Eion Cameron of Waikanae Law gave an informative talk yesterday to an audience of about 25 on this financial ‘product’ aimed at retirees. The main advertiser of them at present is Heartland Seniors Finance as the banks are not keen and the last major bank which offered these, and no longer does so, was ASB.
Eion said that he is only involved in legal work with one or two applications a year.
There are pros and cons with reverse mortgages: the main pro is that you can realise some of the equity in your house without having to leave it, and spend it on things that will enhance your lifestyle.
For some the advantage is that unlike a regular mortgage, regular repayments are not required, so relieving the drain on their cash-flow. There are a significant number of retirees over 65 for whom government superannuation is their sole income.
The cons are several, including the compounding interest, and the fact that the interest rates are 1.5% to 2% above what bank home loan rates are. There are also set-up costs: a building inspector’s and valuer’s report are required (probably about $1,000 for the two), the lawyer’s fee which Eion says is likely to be be about $2,000 (double what it is for a normal mortgage), and the provider also charges ‘draw-down’ fees.
The providers are more conservative about the construction and state of a house than banks are (don’t expect them to approve a mortgage on a house with monolithic cladding).
In Australia, the law is that if the total amount outstanding on a reverse mortgage at the time the house owner dies exceeds the value of the property, the provider has to write off the excess: it can’t form a charge on the rest of the estate. That is not the case in NZ.
How much you can borrow depends on your age: at age 60 you can borrow 15% of the property’s value and that increases by 1% for each additional year of your age. At age 75 you can borrow 30% of it.
Our feeling is that for a lot of people a better option may be to rent a spare bedroom to a lodger; there are students and contractors who may need somewhere to stay for a year so so. You could also go the AirBnB way, although that would require more work commitment.