NZ Herald 27 May 2023

AA sad story.

Reverse mortgages work well in some circumstances. If you own your home with a tiny or no mortgage, and you have spent all your savings and would like more money to fund your retirement, you can borrow against the value of the home.

Unlike an ordinary mortgage, you make no payments of principal or interest until you sell your house or die. The loan is then repaid with some of the proceeds from the house sale.

But it’s really important to understand how fast a loan can grow, with compounding interest, over the years.

That’s why I don’t think I’ve ever written about reverse mortgages in any depth without suggesting that people should avoid them until later in retirement — preferably at, say, 80 or 85. That means the loan will probably grow for no more than 10 or 15 years.

Our table looks at a $100,000 reverse mortgage, at the current Heartland Bank interest rate of 9.5 per cent. The main other provider of these loans, SBS Bank, currently charges 9 per cent.

The table shows that if you stay in your house until 95, and borrow at 65, the loan will grow more than 17-fold, to about $1.71 million. But if you don’t borrow until you are 85, it will less than triple, to $270,000.

Of course the value of your house will almost certainly also grow over any period of at least ten years. The calculator on Heartland’s website assumes that growth will average 3 per cent.

In the table, our $1 million house grows to $2.43 million in the 30 years from age 65 to 95. So even though you will owe $1.71 million, if you sell the house at 95 you will still have equity — what you have left after the loan repayment — of about $720,000.

Unfortunately, in your particular circumstances you’re finding that you don’t have enough equity to move to your preferred retirement village.

Other readers considering a reverse mortgage may want to do some research on retirement village costs first. If moving into a good village now would cost about the same as your house is worth, you can probably assume that rough parity will continue over the years.

That means you could find yourself in the same situation as our correspondent. Perhaps you should skip the reverse mortgage.

On the other hand, if selling your home now and moving to a village — and the subsequent costs of living there — would leave you with considerable money left over, a reverse mortgage could work well.

Note, too, that while retirement villages are becoming more popular, only about one in seven people over 75 now live in them, according to Te Ara Ahunga Ora, the Retirement Commission.

For many people, retirement village costs may not be an issue. They may expect to live in their own home until they die, or move to an aged care facility if necessary — noting, of course, that nobody can predict for certain.

Other points:

• If you are in ill health and don’t expect to live many more years, it will probably work fine to get a reverse mortgage at a younger age.
• If you use a reverse mortgage to make improvements to your home — not maintenance, but changes that will clearly increase its value — that can work better. Your house value will increase, and therefore your equity.
• While the interest rate in the table is 9.5 per cent, in recent years it was lower. In future, who knows? In Heartland’s online calculator — which I recommend — you can plug in your own rate. Note, though, that reverse mortgage interest rates are always higher than on ordinary mortgages, probably because the loans are riskier for lenders and more costly to run.
• You can also use a different rate for house price growth in the calculator. A couple of years back, many would have protested that Heartland’s assumed 3 per cent is way too low. But these days, who knows? It pays to be cautious and assume a high mortgage rate and low house price rise when doing calculations.

Thanks for warning others. I hope that you can at least take some comfort from the fact that you have really enjoyed the motorhome — and still do.

ARule Number One for those considering a reverse mortgage: use up your savings first. You want interest on the loan to compound over as short a period as possible.

Rule Number Two: Borrow only as much as you need at the time. You can get a loan that allows you to increase the balance over the years.

If you stick to those “rules”, and note the comments above about retirement villages, a reverse mortgage could work well for you later on.

By the way, the big banks haven’t shunned reverse mortgages. A few years back, ASB offered them, and I think other major banks have done so in the past. Even now, some banks will quietly do them for individual customers.

Still reverse mortgages are not as common as you might think. Heartland, New Zealand’s biggest provider, has lent to just 21,000 customers, with 6,700 loans currently active. However, take-up has been increasing rapidly in recent years, the bank says.

It’s hardly been “many years” since I last wrote about reverse mortgages! There were several Q&As about it early in 2022. Still, I like to please, so we’ll look further into the topic over the next few weeks. I have a backlog of interesting letters.

P.S. Just to forestall comments from others, your having “only” $500,000 in savings will raise a few eyebrows. Many many New Zealanders would regard that as heaps.

AOther readers and I often say that it’s good to keep track of what other banks offer — in deposit interest or mortgage rates — and to point that out to your bank and ask for a better deal.

But clearly it also pays to follow your own bank’s interest rate movements, especially in the current volatile markets

Shout yourself a treat with some of that $525, and thanks for sharing the tip.

ALast week’s correspondent said, “I can invest in shares on my own without a broker.”

I’m sure she was referring to the fact that you can buy shares using online platforms, as opposed to the old days when you had to use a bricks and mortar sharebroking firm.

You still have to pay a brokerage fee. But through the platforms — such as Sharesies, Hatch and Stake — you can buy tiny parcels and run you own investments much more cheaply and easily than in the past. There are also other platforms through which you can invest in share funds.

A Reader’s Story

Since mid April, to mark the 25^th anniversary of this column, we have run some readers’ stories of how the column has helped them over the years. Here’s another.

AWhat a wonderful, heart-warming letter. Thank you. In turn, I love your positivity and creativity — and your attitude to money.

Best bits of your letter:

• Increasing KiwiSaver contributions when you get a pay rise.
• Keeping up old mortgage payments when interest rates drop — something I bet many others are now wishing they had done. It not only speeds up the loan repayment, but makes it easier to cope with later rate rises.
• Adding a small flat to your house.
• Getting the house shipshape before retirement.
• Enjoying life.