Heartland Bank says falling house prices are not discouraging pensioners from taking out reverse mortgages to supplement NZ Super payments, and money author Martin Hawes agrees.
“I would say keep going,” Hawes said.
“If you have a valuable home and not much else, and you’re saving up, then I think you should look at that option and say, what’s really important in my life.”
Reverse mortgages are loans taken out by retired homeowners to free up equity in their homes, but they’re not the only option for cash-poor, home-rich homeowners, and a French alternative might be on the way. point of adding another.
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Businessman and former chief executive of ACC and AXA Insurance Ralph Stewart said he hoped to introduce a French-style ‘reversion at home’ program through his Lifetime Retirement Income group.
If approved by regulators, it would allow retired homeowners to gradually sell some of their home equity in return for monthly income, as retired homeowners in France have been doing for many years, a- he declared.
Reverse mortgages allow retirees to borrow against their home, repaying the loans only when they decide to sell.
They are used by borrowers to provide cash to spend on things like keeping their home in good repair, traveling or topping up NZ Super when their savings run out.
But the interest charged on reverse mortgages adds up, and if house prices fall, the equity people have in their homes can quickly decline.
But Chris Flood, deputy chief executive of Heartland Group, owner of Heartland Bank, the largest reverse mortgage lender, said there were no signs that falling house prices were worrying borrowers and Hawes said said he was not surprised.
“You are talking about the life of an elderly person. You have to put a value on their well-being,” Hawes said.
Heartland’s calculators show that a $100,000 reverse mortgage on a $950,000 home at its current interest rate of 7.5% would leave the borrower with around $1.07 million in equity after 10 years, assuming an increase of 3% per year in the price of real estate.
But if the price of the house did not increase, the net worth was estimated at $754,000 in 10 years.
Flood said the assumption of a 3% long-term rate of increase for house prices was reasonable and conservative, despite the decline in prices.
Reverse mortgage borrowers have been through a few economic cycles, with an average age of 78, he said.
“House prices are under pressure right now, but house prices are still way up from where they were,” he said.
This was supported by record sales at Heartland, with the bank issuing $165 million in reverse mortgages in New Zealand in the year to June 30.
Figures released in Heartland’s earnings announcement on Tuesday showed customers borrowed an average of 10% of their home’s equity and loans were typically repaid after seven to nine years.
Hawes said the choice between living decently and leaving a bigger legacy isn’t one that should bother most older people, especially if they skimp daily just to meet the rising cost of living.
Flood said an increasing proportion of reverse mortgage borrowers were using a reverse mortgage to pay them a monthly amount to top up NZ Super.
Hawes said reverse mortgages aren’t the only option for cash-poor, home-rich retirees.
Some have opted to downsize to free up cash, while others have managed to slowly sell their homes to their children to generate income, which Hawes said he has seen work well.
Stewart said the homecoming programs were not mortgages. Instead, they were deals in which a financial institution agreed to buy a percentage share of someone’s home in a series of monthly payments over a number of years.
This provided the owners with a steady stream of income.
Home-based reversion companies have made their money in two ways, Stewart said. They paid less than market value to buy a share of the house.
And any capital gain or loss during the term of the transaction was shared proportionately between buyer and owner, Stewart said.
Unlike reverse mortgages, reversion programs meant homeowners knew exactly how much of the house they would own at the end of the term, Stewart said.
And like reverse mortgages, homeowners only repaid the financial institution when they chose to sell, he said.
Stewart said he would target the same market as Heartland.
He estimated that between 150,000 and 200,000 retired homeowners had equity but little retirement savings.
Disclosure documents for Lifetime Retirement Income’s homecoming program have been submitted to Financial Markets Authority Te Mana Tātai Hokohoko for approval, Stewart said.