Is a reverse mortgage right for you?

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You may have spent years building up equity in your family home only to be left with no savings for retirement, leaving you asset rich but cash poor.  A reverse mortgage allows you to access some of the equity in your property without having to sell your house.  There are no repayments to be made on any amount borrowed under the loan.

Many people in retirement do not receive an income other than their superannuation and this is often not enough to sustain the same level of comfortable living that they are accustomed to.

A reverse mortgage is very different to a regular mortgage, and often leaves little or no equity when it does come time to sell.  It is important to read the fine print and assess how much the original loan will balloon out to over time.  There may be other options that are better suited to your situation.

Who is eligible for a reverse mortgage?
In order to be eligible for a reverse mortgage you must own your property with no mortgage and be living in the property.  Most lenders also require a minimum age of 60 years. 

How much can be borrowed?
The value of your house will dictate how much the provider will lend you under the reverse mortgage.  Often the amount is a percentage of the value of the property.  Because of this, it would be in your interest to have an up to date property valuation from a registered valuer.  There is no requirement to be earning an income or have savings stored away in the bank.  This loan is purely based on ownership of a mortgage free property.

How does a reverse mortgage work?
You borrow an initial principal sum.  The lender charges compound interest (similar to regular mortgages) on the loan amount.  Because you are not making repayments each week to reduce the principal sum and pay interest, any interest accrued will get added to the total loan.  Interest will then be charged on that larger loan amount.  This means that the size of the loan will grow significantly over time.  As long as you are still residing in the property, even if the loan amount grows to be larger than the value of your property, you will still be allowed to remain living there.

When does reverse mortgage have to be repaid?
Most lenders require repayment of any loan balance, all interest accrued and any fees and costs incurred by them under the loan, when either:

(1)  the property is sold,
(2)  you pass away (or in the case of a couple when the survivor of you passes away), or
(3)  if you require long term residential care or hospitalisation and move out of the home

There are often exceptions when you are selling your property and purchasing another property with the sale proceeds.  You may not be required to repay the loan, and may be able to transfer the loan to your new property.

It is important to talk to a variety of lenders as each lender has different terms and conditions, interest rates, and flexibility in terms of time of repayment.  You should find out which repayment option best suits or will be most likely to suit your situation.

What are the benefits of a reverse mortgage?
The main benefit of a reverse mortgage is that there are no repayments on any amount borrowed until the expiry of the loan.  You are not required to make any repayments on the principal sum borrowed, or any interest.  You can free up cash without having to sell your home and move.

What are the pitfalls of a reverse mortgage?
There are plenty of things to be aware of before agreeing to a reverse mortgage.  These include, but are not limited to:
 

  • Finding out whether receipt of a lump sum or ongoing sums will affect the superannuation or other benefits that you receive; 
  • The ongoing maintenance and insurance costs that will be required by the lender in order to protect their interest in your property; 
  • If you need or want to move into a smaller property or a retirement village you may be required to pay back the loan and then not have enough funds to do so; 
  • If you need to move into a rest home or have residential care, your options may be limited due to a lack of funds available after any reverse mortgage loan is repaid; 
  • A reverse mortgage eats into any inheritance that you may have built up for your children.

Other options available to you
Many lenders will, if you own your property free of any mortgage, lend you a principal sum of money plus enough money to repay any interest payments on that principal sum.  This means that you will know on the drawdown date the maximum amount that you will be repaying to the bank or lender when you either sell your home or pass away.  You can arrange for automatic deductions or payments to be made so that there is no added obligation on you to do this.  There will then be less stringent maintenance costs involved but the same level of insurance will be required. 

It may also be an option to have your children “buy you out” of part of the property.  That is, they will be making funds available for you to use during your lifetime and can have a written agreement with you as to ownership of the house and what is to happen on the selling of the house, and/or what is to happen on your death.  Your children can then be seen to be buying into their inheritance and will also benefit from any increase in the value of the property.  This arrangement should be properly documented in a Deed of Family Arrangement. 

If you are considering applying for a reverse mortgage, or to discuss your other options, contact solicitor, Carolyn Ranson by phone on 09 837 6891 or email carolyn.ranson@smithpartners.co.nz