NZ Herald 22 September 2018

AIn some situations, I like the idea of reverse mortgages — sometimes called home equity releases.

They can let retired people make use of the hundreds of thousands of dollars they have tied up in their homes — for home maintenance, paying off a remaining mortgage, living costs or treats like travel.

I may get a reverse mortgage myself, actually. My plan is to spend my retirement savings by 90, and then — if NZ Super isn’t enough at that stage — supplement my income with a reverse mortgage, so I can have a ball in my nineties!

But I’m far less enthusiastic about the idea for younger people like you.

Firstly, though, let’s explain reverse mortgages to other readers. You borrow money from a bank — or other financial institution — but you don’t make any repayments until you sell your home or die. In the meantime, the interest compounds.

That means that, unlike an ordinary mortgage, your loan grows. And if you live for several decades after taking out the loan — which could well be the case for you two — that growth can be scary.

Interest rates on reverse mortgages are always higher than on ordinary mortgages. That’s probably mainly because they’re riskier — the bank doesn’t know when they’ll get their money back. Costs at the start also tend to be higher, perhaps because the lenders put more time into setting up these loans and making sure borrowers fully understand them.

Over the years, different banks have offered reverse mortgages. ASB was doing it a few years back, but the main lenders now seem to be Heartland Bank and SBS.

Heartland’s online reverse mortgage calculator shows what a difference it makes if you take out a loan at 60 as opposed to 90.

Let’s say your house is worth $1 million and you borrow $150,000 at Heartland’s current interest rate of 7.82 per cent.

• If you borrow at 60, and live to 98, the loan will grow hugely — to more than 19 times as big, at $2.9 million. The calculator shows that if your house value has grown at 3 per cent a year, it will be worth a bit more than the loan, but not much.
• But if you borrow at 75, and live to 98, the loan will grow much less, to just over $900,000, and you’ll still have plenty of equity in the house (the value of the house minus the mortgage).
• And if you borrow at 90, and live to 98, the loan will have grown to $280,000, and you’ll still have heaps of equity in the house.

At 75, and especially at 90, the loan has much less time to compound. That’s why Heartland will lend a maximum of only $150,000 on a $1 million house if you are 60, but $300,000 if you are 75, and $450,000 if you are 90.

You also need to keep in mind that the interest rate could well rise in future. Also, house prices might not rise as much as 3 per cent a year. All in all, taking out a reverse mortgage when you have many years yet to live — hopefully — is pretty risky.

However, there might be a way around this for you. You say you have money in KiwiSaver and other pensions. A bank might give you a reverse mortgage in your fifties on condition that you pay them back when you get access to the pension money.

It would be worth approaching not only Heartland and SBS but also your own bank, and possibly even other banks. They sometimes do one-off arrangements.

One other cheeky thought: If you’re lucky enough to retire before you turn 60, how about doing volunteer work — not just for the good of others, but because research shows that giving makes people happier?

For more on reverse mortgages, read on.

AYour plan and mine pretty much match.

These days, though, with house prices so ridiculous in Auckland and elsewhere, you don’t have to have a home at retirement, as long as you’ve saved heaps to cover your retirement accommodation — whether you buy a place then or continue to rent.

A few points to note about reverse mortgages:

• Don’t borrow more than you need at the time. You don’t want to be paying interest on borrowed money that’s sitting in a bank account.
• A warning from the website www.govt.nz: “If you and your partner jointly own your home, make sure both your names are on the loan document. If one of you moves into residential care or dies, the other partner may have to move out too if they’re not one of the borrowers.”
• Lenders usually offer a “no negative equity” guarantee. That means that even if your house is eventually sold for less than the mortgage total, you or your estate won’t have to make up the difference.
• If you want to leave some money to the family, ask for “equity protection.” That means that when the house is eventually sold, an agreed percentage of the proceeds can’t go towards repaying the mortgage. However, this will reduce the amount you can borrow.
• It’s good to get a loan that will be transferable if you move house or go into a retirement village.

For useful information from the government about reverse mortgages, see here. There is also a good article on www.consumer.org.nz.

AWhat a great employer, what a shocking loan, and what a good outcome.

Unfortunately not everyone has a boss who will rescue them from a situation like this.

And I agree that many people who borrow from payday lenders probably don’t realise how bad the deal is, and are reluctant to complain when it’s pointed out to them.

Hopefully the government will come up with a better system to control this type of borrowing.

More on this subject next week.

AYou’ve got an eagle eye! And your first point is quite right. The expert I quoted should have made it clearer that there are no minimum contributions levels for first home withdrawal. You just have to belong for at least three years.

But I think you’re quibbling about property ownership. The expert said the couple “may” be eligible, and that could include qualifying as a previous but not current property owner.

Your mention of the proposal to let 65-plusers join KiwiSaver is good. I’ve written about it before, but repetition can’t hurt.

On share investing, you’re right. But it’s not uncommon for professional managers to do worse than individual investors who buy and hold — especially after taking into account fund fees and the costs of quite frequent trading by many professionals.

Thanks for reading so closely.