Using the equity in your home to fund part of your retirement sounds an appealing solution especially with:
- Historically low-interest rates punishing those with term deposits,
- Reports indicating we will on average, live longer,
- NZ Superannuation no longer providing an attractive retirement, and
- The massive rise in house prices meaning, an increasing number of retirees have the majority of their wealth tied up in their home.
A reverse mortgage is a loan that can enable an asset rich, cash poor older homeowner to access the value held in their property by taking out a loan secured against their home. There are usually no regular repayments on the loan. This means the homeowner will receive capital (i.e., money) and in exchange, they delay payment of the loan until they die, sell the home, or move out of the home (for instance, into a retirement village).
This all sounds pretty good, but there are a number of fishhooks that ensure reverse mortgages don't become a mainstream retirement solution.
High-interest rates: At the time of writing, reverse mortgages had an interest rate twice that of a one year fixed home loan. This high-interest rate compounds over time and is deducted from the house equity at the end. This compounded interest can amount to a large amount over time.
Reverse mortgages are complex and aren't right for everyone: They should only be entered into with a full and complete understanding of your obligations as a borrower, which usually includes you being required to keep up with home insurance payments and payment of council rates. Reverse mortgages have no shortage of conditions and limitations. There are even numerous types of properties that lenders won't lend against - for example, lifestyle blocks, retirement villages, or homes with a possible leaky building history. There is plenty of fine print to read through, so legal advice is a must.
Reverse mortgages could be dangerous if your circumstances change. If the intention was to use up your home equity, then die, then that is fine if you don't intend to leave a legacy for the kids. However, if you need to sell the house to buy a retirement home or enter full-time rest home care, reverse mortgages could have eroded a big portion of your home equity, making it difficult to fund the new purchase.
Naturally, the best alternative to a reverse mortgage is sound retirement planning many years in advance. This needs to be followed through with deliberate steps to ensure an enjoyable retirement free from worries about money.
If you'd like to discuss anything mentioned in this article, it would be our pleasure to assist.
Please contact us.