Reverse Mortgages It’s ‘On The House’
A relatively new development in the N.Z. mortgage scene is the ‘Reverse Mortgage’. While this facility has been available for many years in the USA and UK and NZ in various forms, it is only recently that the product has been refined and actively marketed by recognized main stream lenders in N.Z.
Essentially, property owners over the age of 60 can borrow against their property for any reason whatsoever within certain stated limits, with the absolute assurance that they are not required to pay any portion of their principal or interest during their lifetime unless the property is sold. The older the borrowers, the more expensive the property concerned, the more the lenders will lend.
It is a fact that there are many retired people who are, because of their property ownership, asset rich yet, cash poor. The traditional kiwi love of real estate and the high regard home ownership has in our psyche, has meant that the main focus for a large majority of us has been to invest in our own homes, upgrade, and pay off the mortgage before retirement effectively ‘locking up’ our savings in ‘bricks and mortar’.
The obvious answer to unlock the cash value, has been to sell the home and downgrade to a cheaper property and perhaps a more compromising lifestyle away from friends and neighbours of many years standing. With the advent of, and wider acceptance of Reverse Mortgages, a retiree or retired couple have better choices which will allow them to ‘unlock’ tax free cash which can be used for any reason whatsoever. It may even be possible, after meeting certain criteria, to arrange future ‘top up’s’ if required as age and equity increases. Also part of the loan advanced may be used to refinance off an existing mortgage.
Any homeowners aged 60+ ( retired or not ) wishing to renovate their home, replace their car, get an operation, assist family members or simply to take that long promised world trip etc..etc… may now be able to do so, knowing that they only pay back the loan plus accruing interest either on the sale of their home or on their demise. If a reverse mortgage is arranged and the borrower/s decide to sell and buy another home, providing there is still adequate equity in the new home then the reverse mortgage can be transferred.
The lenders charge an arrangement fee and a valuation from a valuer of their choice is required.
A guideline to what the lending criteria and limits that are available are as follows.
From age 60, 15% of the equity in the home can be borrowed with a minimum loan of $10,000 available. The amount able to be borrowed, increases with age. The maximum amount available being 40% of the equity at age 90 with the loan value not to exceed $250,000.
The interest rate charged is obviously above the major lenders floating rate and the amount owing is compounded until the house is sold and the owners go into long term care or pass away. Solicitors must always be consulted when considering a reverse mortgage and discussions with family members as to the full implications of the loan should be held. A guarantee can be given to the borrower/s that the value of the loan will never exceed the value of the home so they can rest assured that no matter what state the housing market is in or their longevity situation, the amount that they owe will always be covered by the house sale and there will be no further claim against the estate.
When we consider that over the last 30 years the N.Z. house price index shows an increase averaging 10% p.a., and this is a tax free increase in value, unless it can be taken advantage of the owners are no better off. A reverse mortgage would enable many to increase their quality of life or achieve a particular goal during their own lifetime rather than only be passed on to their estate on their demise. In one particular case I have had to deal with, my client had lived in her home for 30 years. She was reluctant to leave, and because she had no family her estate would go to charity. Why shouldn’t she have the opportunity to live out her final years with some level of dignity.
Whilst some of us may cringe at the thought of our parents needing to borrow to make ends meet in retirement, we need to appreciate that all clients have different needs and there is a percentage of our population going into retirement with very little or no savings at all.
To date, the Reverse Mortgage lenders are exceeding their market expectations and they are confident that the market will expand as the ‘baby-boomers’ become more accepting of the concept.
Printed with the permission of Tarawera Publishing and NZ Pproperty Magazine