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If you
are concerned that the slowing property market means
that selling your home and moving to a retirement
village or another newer property is not an option, you
may consider a reverse mortgage to pay for a new
kitchen, bathroom and heat pump. Or, if your children
and grandchildren live overseas, you may be considering
a reverse mortgage to pay for a trip to see them. If
your current car is no longer as easy to park and is
costing you a fortune in fuel, you may be thinking about
a reverse mortgage to fund a new vehicle. So, how do
reverse mortgages work? When are they repaid? How much
can you borrow? How much do they cost? Are there other
considerations?
You contact
the provider, who will arrange for a valuation of your home.
The loan application is completed.
You arrange to see your
Lawlink solicitor to get independent legal advice.
A mortgage is registered
on your title.
The funds less the fees
(approx $1,540 plus your lawyer's fees) are paid to your account.
With most providers, only people over 60 who own their own home can
apply. The amount you are able to borrow depends on the value of your
home and your age. If your home is owned by a family trust, all the
trustees would need to sign the application form and the loan documents.
The provider may have a minimum of $10,000. Top ups of $5,000 or more
are available. If a couple are borrowing, the age of the youngest person
will apply.
At age 60 you can borrow
up to 15% of the current value of your home.
At 70 this increases to
25%.
At 80 it goes up to 35%.
At 90 and over it goes
to 45%.
The loan is repaid when the house is sold or when you die. The key
difference between a normal mortgage and a reverse mortgage is that the
interest compounds.
You can set up the loan so that a set portion of your
home's current value can be ‘protected' for your estate. Most providers
will guarantee that your estate will not have to pay more than the sale
proceeds of the house. For this to happen you must have complied with
all of their requirements.
Your estate will be reduced. For this reason we
recommend that the loan be discussed with your family, they may be in a
position to lend you the funds at a better interest rate.
Depending on the amount borrowed, the equity in your
home may reduce to the point where you will not be able to purchase a
retirement unit if that is your long term plan.
Borrowers have ongoing obligations to the loan provider
to maintain insurance and maintenance and allow regular valuations to be
carried out by their staff.
The mortgage contract will include provisions requiring
you to maintain the property.
If you do not, the provider, after giving you notice
outlining your failure and requiring you to remedy it, can exercise its
right to enter the property and take possession if they are concerned
that it is not being maintained and their interest in the property is at
risk.
As the amount you borrow is based on your age and the
value of the property, the ‘softening' of the housing market will mean
you may not be able to apply for top up later on. The providers are
currently advising people to only borrow what they need.
For example
In January 2008 our clients aged 65 were approved to
borrow $26,390 including the lender's costs of $1,390. We prepared a
table (see below attachment) to show them the effect of the compounding
interest at 11.55% over five years. During that time they ‘pay'
$19,191.21 in interest, i.e. the value of the mortgage is now
$45,581.21.
The clients decided not to proceed with the loan. They
felt it was an expensive option.
In June 2008 the interest rate had moved to 12.25% pa
and the provider's fees had risen to $1,540.
Reverse mortgages use the equity in your home.
Interest compounds.
The loan is repaid when the house is sold or when you
die.
Independent legal advice is essential; your Lawlink
lawyer will be able to advise you.
© Harkness Henry & Co
Email
jane.quinn@harkness.co.nz
Website
http://www.harkness.co.nz/ |
