NZ Herald 18 May 2024

AWould you really prefer to have had a return on your money? Think about it!

Actually, though, you have received something significant for all the dollars you’ve paid out: peace of mind. The knowledge that if one of you had died, the other would have received a large sum must surely have made you sleep better — especially while you were raising your children and paying down a mortgage.

Now, though, you probably don’t need the cover any more, with your mortgage-free home and close to half a million dollars in savings. I think the $3,780 you’re paying each year, which as you say will keep rising, is probably better put into your KiwiSaver accounts — or health insurance if you haven’t got it.

As people get older, it makes sense to drop the life cover and pick up the health cover. Read on.

AThe price of health insurance does rise sharply as we get older. But you just have to look around you to understand why. Even though you and your husband are healthy, I would be surprised if you don’t have friends your age who have various health issues — in some cases despite their healthy lifestyles.

In any case, I don’t think health insurance — like house, contents and car insurance — is just about how much you’ve paid versus how much you’ve claimed. If you pay a lot and claim little, count yourself lucky, rather than ripped off. While people who claim often might get their expenses covered, they still face all the worries and hassles that come when their health — or house or car — goes wrong.

You never know what lies around the corner. If your or your husband’s health suddenly deteriorates, the last thing you need is financial worries as well. I suggest you stay insured.

AThanks. I’m sure your words will comfort many.

AYou add another perspective on retirement costs. Thanks for writing. More on this next week

AI mentioned reverse mortgages in passing last week. Perhaps it’s time to once again go into the subject in a bit more depth.

Homeowners over 60 with mortgages repaid or nearly repaid can often get a reverse mortgage. They repay no principal or interest until they sell the house or die — although they can usually repay the loan if, for example, they receive an inheritance in the meantime.

These loans enable people to make use of some of the money tied up in their home, instead of struggling financially through retirement while owning an asset often worth more than $1 million.

The downside — and it’s a big one — is the interest compounds over the years. What’s more, the rate is higher than on an ordinary mortgage. The main providers of the loans are Heartland Bank, which currently charges 9.98 per cent, and SBS, which charges 9.95 per cent — although the rates are variable and could be expected to fall over the next few years.

How fast do the loans grow? The useful reverse mortgage calculator on Heartland Bank’s website tells us that:

• A 65-year-old in a $1 million home, who borrows $100,000, would owe about $1.2 million at 90 — although it’s not as alarming as it seems, because their house value would have risen lots by then.
• A 75-year-old, with the same house value and $100,000 loan, would owe about $440,000 at 90. That’s just over one third of the 65-year-old’s debt.

As I mentioned last week, I recommend spending most of your savings before getting a reverse mortgage. Ideally, don’t get one until at least your mid 70s.

Even then, avoid borrowing a lump sum. Most providers will let you either gradually increase your loan — receiving, say, $300 a week — or add to your borrowings whenever you need to. The idea is to keep the balance as low as possible for as long as possible, to keep the compounding interest under control.

Getting back to your letter, sure, if people do have other choices, use those first.

On limiting options when you sell your house, both Heartland and SBS will in some cases let you transfer the loan to your new place. But they don’t tend to lend on retirement village accommodation. Because of that, I have suggested before that people considering a reverse mortgage may want to check out retirement village costs first.

If moving into a good village now would cost about the same as your house is worth, you should probably give reverse mortgages a miss. But if selling your home and moving to a village, and the subsequent costs of living there, would leave you with considerable money left over — like the couple in the Q&A above — a reverse mortgage could work well.

Note, too, that even though retirement villages are increasingly popular, only about one in seven people over 75 live in them. I expect it’s more common for retired people to move to smaller homes or to a lower-priced region, in which case a reverse mortgage on their earlier home may not be a problem.

The sad stories you refer to are probably about people who have taken out a reverse mortgage in their 60s or early 70s, and haven’t kept a tight rein on how much they borrow.

A much better idea is to plan to spend your savings so they run out in your mid 80s. After that, many people find NZ Super is enough. But if you want to race around the world for your 90^th birthday — or hire extra help to keep you in your own home — a reverse mortgage might be just the thing.

AIt’s been heartwarming to receive yours and so many similar emails. Thanks very much, everyone. Among the comments:

• I LOVED the answer you gave to the person (I’m imagining it was a pompous, self-important older man).
• I do not put pen to paper lightly but the ignorance portrayed in that letter angered me.
• I had to laugh when I read that correspondent’s question — it must have been tempting to respond “F… O..” in this modern age. Be interesting to see if they apologise!

Some of the other comments about the letter writer are too rude to publish. But he didn’t really bother me. He was entitled to ask about my credentials — even if he could have just read most of it on my website!