With inflation at its highest level in three decades and interest rates still relatively low by historic standards, more and more homeowners over 60 are weighing up whether a reverse mortgage could help them live a better retirement.
The reality is, reverse mortgages aren’t right for everyone. If you’re determining whether or not a reverse mortgage would be right for you, here are some of the pros and cons to consider.
Benefits of a reverse mortgage
You’re able to access funds without needing to make regular repayments
One significant reason Kiwis are considering reverse mortgages today is because of the increasing cost of living, which can be difficult to cover with New Zealand Super alone. Unlike a standard mortgage, a reverse mortgage allows you to access funds without needing to worry about making regular repayments. Instead, the loan amount and any accrued interest are paid off when you sell your house, move into long term care or pass away – and you can choose to repay, in part or in full, at any time with no penalty.
You can draw down the funds in a way that works for you
Some loan providers offer flexible drawdown options, allowing you to choose whether you’d like an initial lump sum, a regular monthly advance to supplement your income or a ‘line of credit’ that you can draw from, as and when you need. This flexibility means a reverse mortgage can be tailored to your individual needs.
You’re protected in numerous ways
A reverse mortgage should provide you with guaranteed lifetime occupancy of your home. The amount you owe on the loan will also never be more than the sale proceeds of the house (also known as a no negative equity guarantee). Some providers, like Heartland Reverse Mortgages, also offer an equity protection option where you can safeguard a certain percentage of the equity in your home, and all providers should offer a cooling off period if you change your mind.
You remain the owner of your home and can live in it as long as you wish
Unlike ‘home reversion’ schemes like the one across the ditch in Australia, a reverse mortgage does not mean you sell all or part of your home to the lender. You continue to own your home and benefit from any capital gains.
Considerations before taking out a reverse mortgage
You’ll end up paying more interest the longer you have the loan
Interest is added to a reverse mortgage loan balance monthly, meaning the loan balance will grow over time – and the longer you have the loan, the more interest you’ll owe. Because the loan is repaid from the sale of the property, the interest will impact the amount of equity you have when you sell. Keep in mind, though, that any increases in your property value may help to offset the impact of interest charges on your equity.
If your children want to keep the house, they’ll need to pay off the loan
Many people who have children that are keen to keep the house after they move out or pass away, are unsure if a reverse mortgage is right for them. That’s because the loan needs to be repaid within 12 months of you no longer living there, which is typically done using the sale proceeds of the house. If your children are able to pay off the loan and assume ownership of the house without selling, then it could still be a viable option for you.
The interest rate is higher and can change
Because of the loan’s protections, flexibility and lack of repayments, the interest rate on a reverse mortgage is higher than a standard home loan, but typically lower than credit cards and personal loans. In addition, reverse mortgage interest rates are variable, meaning they can fluctuate over time and impact the size of the loan. The benefit of a variable rate is that you have the flexibility to repay the loan at any time.
There are upfront costs
Like most loans, there are often valuation and arrangement fees charged as part of the loan establishment process. To ensure you’re making an informed decision, you’re also required to receive independent legal advice, the costs of which can be added to the loan. Make sure you do research into the fees and charges you’ll need to pay when looking into reverse mortgage providers.
Heartland Reverse Mortgages recognises their product isn’t right for everyone’s situation – but for those it is right for, it can be life-changing. Since 2004, Heartland has helped over 19,000 Kiwis enjoy more freedom in their retirement.
They have a team of friendly specialists and a process that ensures you make an informed decision with no pressure. If you think a reverse mortgage could be right for you, call Heartland on 0800 488 740 or send an email to reverseinfo@heartland.co.nz.
Applications are subject to loan approval criteria. Heartland Bank Limited’s responsible lending criteria, terms, conditions, fees and charges apply.