A reverse mortgage is a loan where you borrow an amount of money against the value your property. The loan is paid back when you sell the house or when you pass away. Banks offering a reverse mortgage will dictate the percentage of your home’s value that you can borrow. You must be at least 60 to apply for a reverse mortgage, and your home must be mortgage-free or nearly mortgage-free. The money can be spent on anything, such as holidays, cars, property maintenance, health care, and as an income top-up. However, a reverse mortgage is not ideal for everyone or every situation, and you should carefully consider if you need the money and how long you intend to stay in your home. Moneyhub
, an independent consumer website aimed at providing impartial information on consumer and financial services review reverse mortgages as a ‘last option’. It is a long-term form of borrowing that Moneyhub says may charge various fees and can make it a costly way of financing. You can read their full guide to reverse mortgages here
. You should always seek independent financial advice before committing to a large financial decision.
Pros of reverse mortgages
There are some benefits to a reverse mortgage if it is planned well. For people who want more income than what Superannuation offers them, they may choose to take a reverse mortgage to supplement their pay. A reverse mortgage can be paid in a lump sum of cash or in regular instalments. You are allowed to spend the money on anything you want to. Depending on your age, you can borrow 15-40% of your home’s current value.
Your loan will accumulate interest, and New Zealand reverse mortgage providers currently offer around 8% interest rates. However, if house prices are increasing over the time you have your reverse mortgage, this may reduce your overall loss in equity. If timed correctly, you may see minimal increases from interest when you repay the loan.
New Zealand providers guarantee that you will never go into negative equity, which means that if your loan balance exceeds your home value, you or your estate will not be chased to pay the difference.
A big drawing point for people considering a reverse mortgage is that you do not need to make repayments until your home is sold, and you do not have to leave your home until you are ready. While living in your home for a long time after taking the loan may build up interest, you will never be forced to move. Depending on your agreement, the loan may also be portable if you decide to move into a new home or a retirement village.
Cons of reverse mortgages
While reverse mortgages may sound very appealing, there are some important risks and drawbacks to consider. Firstly, lenders may not offer reverse mortgages on some types of properties. Larger properties such as lifestyle blocks and farms, and retirement villages may not be covered by reverse mortgages.
A reverse mortgage lets you stay in your home as long as you wish, but it also means that you have to stay in your home or sell it. You will not be allowed to rent out your home and travel or move into care without selling your home and paying back the loan. This may be a concern for people who want the freedom of being able to decide what they want to do in their future or who have future travel plans.
Depending on the agreements made with the lender, your contract may set out rules that you have to keep up with home insurance payments, paying council rates, and looking after the property. For some people, this may be a challenge and should be carefully planned to ensure you can meet your agreement. There are also a range of fees charged to set up your reverse mortgage, and these can easily top $2,500. While these fees can be paid with the money from your loan, it is still an expense to consider.
Because you are not making regular repayments on a reverse mortgage, the impact of interest compounding can make your loan blow out drastically. Compounding interest can eat up into the remaining equity of your house. Depending on the housing market when you sell your home, this may lose you a lot of money. It can also have serious implications if you need to move and pay for residential care. Interest rates on reverse mortgages currently sit at around 8%, which is higher than normal mortgage interest rates which are around 4-5%. Interest rates are also floating, which means they may change during the time you have your loan.
Other factors to consider
If you decide that a reverse mortgage is the right option for you, there are some things you should consider before signing the agreement. You should always get independent legal and financial advice when deciding to make a big commitment like agreeing to a loan. You should not decide on taking a loan lightly, and you should only borrow what you need when you need it to avoid a massive loan repayment later on. If you are part of a couple, you should make sure that both of your names are on the loan document, so that if one person passes away or needs residential care, the other person does not end up homeless.
If you need more money but do not want to take out a reverse mortgage, there are some other options you can consider. These include:
- Selling your house and downsizing. If you buy a house that is cheaper than your current home, you will release some of the equity from your home
- If you have extra space on your property, you may choose to subdivide or cross-lease your section
- If you do not want to sell your home, you may consider renting it out and moving somewhere smaller
- If you have extra room inside your home, you could rent out the room and take in a boarder
- You can ask your council about rates relief and rebates
- Consider selling your house or part of it to family, or arrange a loan with your family using the house as collateral. Make sure to gel legal advice and documentation to avoid any future disagreement
Websites of interest
- For more information on reverse mortgages, visit Consumer
- If you want to apply for a reverse mortgage, the current lenders in New Zealand are Heartland Bank and SBS Bank
- Visit Moneyhub for information on any financial matters, including reverse mortgages and what your alternatives may be