Reverse Mortgages: When going backwards can be the forwards move you just may want to consider
Reverse Mortgages have been in New Zealand since the early 2000’s. According to Google, the concept was actually devised by a bank manager in the USA back in 1961 who was wanting to make sure that the widowed wife of his high school football coach could stay in her home after losing her husband. If this is true, there is no available information to explain why it took so long for reverse mortgages to become a readily accessible and/or an in- demand financial product in New Zealand. However, we can hazard a guess that it was because it was not something that good old fashioned Kiwis wanted, needed, or that had even registered on their radars. It’s no secret that home ownership has always been in New Zealanders’ DNA – the idea of owning our own home (white picket fence voluntary) is an obsession that has been around in NZ for a long time. But the traditional notion of home ownership was buying a home, (usually) getting a loan from a bank to help with the purchase, and then paying the loan off over time from good old hard mahi until there was no more money owing. Cha-ching! #GoalAchieved #Winning.
Reverse mortgages are exactly the opposite of the example above – the lender will pay the homeowner for a share in the equity owned in the property (land and buildings only and there may be restrictions on the types of property owned). This product also only applies to homeowners who are aged 60+. With rising house prices, this allows many asset-rich but cash-poor property owners to borrow against their home to complete home repairs, consolidate debt or basically spend it on whatever their heart desires without needing to make any repayments until the property is sold – this usually occurs when the homeowner moves to a retirement complex or passes away.
This all sounds pretty good you say, so are there any downsides?
The main shortcoming is obvious – a reverse mortgage can destroy the equity in your home. Generally, the floating (not fixed) interest rates that apply to a reverse mortgage will be a lot higher than the variable home loan interest rates offered by the leading banks in New Zealand. These interest rates also usually compound at a monthly rate and because there are no repayments being made, the debt can skyrocket very quickly. This can mean that the tidy inheritance from property ownership that you plan to leave your family when you die is eroded by the debt owed to the lender under the reverse mortgage. Most reverse mortgage providers require family consultation before the loan documentation is signed – this ensures that the family are all aware of the reverse mortgage application and the reason for it so that there are no awkward surprises later on down the track.
With any financial product, careful consideration needs to be taken to ensure that the risk does not outweigh the rewards. For example, taking out a reverse mortgage loan to fund an overseas holiday (obviously not in Covid-19 times) is desirable but is probably not a necessity, whereas, taking out a reverse mortgage loan to fund repairs/upgrades to your house is probably warranted.
If you are interested in finding out whether a reverse mortgage is the right product for you we recommend that you speak with your lawyer or financial advisor. The Property Team at Schnauer and Co Lawyers are available if you would like to discuss this further.