Considering a Reverse Mortgage?
What is a Reverse Mortgage?
A reverse mortgage allows people aged 60 years and over to borrow against the value of their home. The amount of money you can borrow depends how old you are and whether you still have a mortgage on your house. The two providers of reverse mortgages in New Zealand (Heartland Bank and SBS Bank) will lend up to 15-20% of the value of your home if you are 60 or over. If you are 80 or over you can borrow up to 35-40% of the value of your home.
Average house prices in New Zealand increased by nearly $300,000 between December 2019 and December 2021, so is this a good time to start borrowing against your home? The answer is probably no, but there are many aspects you need to consider before making a decision.
What is the cost?
There are a number of costs incurred at the beginning of a reverse equity loan, which take away some of the value of your house before you get any money. Heartland Bank lists valuation fees of $600 – $855 and an initial application fee of $920. Additional fees apply when you set up monthly payments to you and each time you make one-off withdrawals against your house.
The interest rate the bank charges against your loan is higher than the rate normally applied to mortgages. In February 2022 Heartland Bank was charging an interest rate of 6.1%, while Kiwibank was offering mortgages at a variable interest rate of 4.25%. Variable interest rate loans means the bank can change your interest rate at any time. Both banks offering reverse mortgages do not offer the option of fixing your interest rate. That level of difference in interest rates between mortgage and reverse equity loans has been consistent since reverse equity loans became available.
Interest rates are currently very low and the Reserve Bank has indicated it is likely to increase the Official Cash Rate (OCR) progressively over the next two years. That will result in increases in interest rates for mortgages and reverse equity loans, which means the size of the loan against the value of your house will get larger more quickly.
Are there any risks?
There has been strong growth in house prices in New Zealand over the past 30 years, but there have been periods where house prices have fallen, most recently during the 2009 Global Financial Crisis. There is no guarantee that house prices will not fall again.
The risk of a decline in house prices is higher now because of the extreme growth in house prices we have experienced over the past two years. There will also be an impact from the interest rate increases in 2022 and 2023 on households with high levels of debt, with some struggling to meet their interest payments.
It’s important to recognise that your ability to downsize to a better home might be limited if you accumulate too much debt against your home.
Options to consider instead of a reverse equity mortgage are:
1. Downsizing now to a smaller home, where the heating, insurance and rates costs will be lower.
2. If you have a large section, subdividing it is a possibility, but the initial costs are high.
3. If you have enough space, there are now options to add a new modern house for yourself on your section and have one of your children take over the main house. Many councils have changed their granny flat rules, with some allowing houses up to 80m² to be added without needing to subdivide.
4. Consider selling your house, or a part-share of it, to one of your children, so they can help you out with monthly or large one-off expenses. The cost of interest for them to buy your home is less than for a reverse equity loan.
This is a very brief overview of the pros and cons of taking out a reverse mortgage and the other options you could consider. It is important to consider the impact of the financial decisions you make now on the inheritance you leave for future generations.
If you have children, have a conversation with them about how to meet costs that you are struggling to afford, such as significant repairs to your home. If costs like insurance or rates are becoming too high, are there ways they might be able to help. It’s essential to get good independent financial advice and to talk to a lawyer about any of these options.
The Bible suggests we should pray, and seek wise counsel. ‘The Lord says, “I will guide you along the best pathway for your life. I will advise you and watch over you.” (NLT)
“Fools think their own way is right, but the wise listen to others.” (Proverbs 12:15 NLT)