For many New Zealanders, the family home is their most valuable asset. For some people this can mean they are asset rich but cash poor. It is such people who are being targeted in marketing campaigns for reverse mortgages. These mortgages can have serious implications for the home owner. Although they are relatively new in New Zealand, they have been around for many years in the USA and UK.
What is a Reverse Mortgage?
Reverse mortgages (also called reverse annuity mortgages and equity release loans) involve a loan borrowed against the equity in the home owner’s property. Generally, the loan is repayable on the sale of the property or upon the owner’s death, whichever occurs first. They are particularly attractive to people who have retired and whose home is mortgage free.
Pros and Cons
- Release of equity
- Lump sums for:
- Medical purposes;
- New Car
- Home repairs/maintenance
- Amount available is limited to a percentage of home value depending on owner’s age for example:
- @ age 60 = 10%
- @ age 90 = 40%
- No repayments
- You remain the owner of the property
- No income requirement
- Associated fees (these will depend on the provider)
- Less equity in the property
- Potentially less for the kids
How much do reverse mortgages cost?
Reverse mortgage schemes are often advertised on the basis that there are no regular repayments. Whilst this is true, interest and fees are still charged for so long as the loan continues and are added to the balance, which will ultimately have to be repaid. The interest rate will usually be higher than an average bank loan. The cost can be significant depending on your circumstances and the particular provider.
You need to consider that the increasing value of your home may not keep pace with the debt owed under the terms of the mortgage. Interest may compound. The amount owing will continue to increase the longer the loan remains unpaid.
A reverse mortgage is not for everyone, but if you are contemplating taking out a reverse mortgage, it is absolutely vital that you obtain independent advice, and fully understand the terms of the loan and the long term implications for you. Reputable companies offering reverse mortgages will require you to take independent advice before proceeding.
Although the Government has indicated that a code of practice is to be established for reverse mortgage schemes, it is not yet in place. Home owners should be wary of any reverse mortgage scheme which does not state that it is mandatory for the home owner to obtain independent legal advice before proceeding.