About 40% of people aged 65 and over have virtually no income other than NZ Super and a further 20% have only a little more.
By Susan Edmunds of RNZ
Tapping into your home’s equity to fund your retirement might not be popular with children hoping for an inheritance but it could be a way for some retirees to supplement their pension by as much as 50%, the Retirement Commission says.
Te Ara Ahunga Ora/The Retirement Commission commissioned Motu Research to look at how home equity release schemes provide value for money and how they might provide a suitable form of retirement income for some people.
The research showed that, for about 25% of older households who have low retirement income and savings but high levels of equity in their home, equity release products could be a better option than turning to personal loans or credit cards.
In 2021, the average net worth of retiree households was $1.143 million, of which home equity was $400,000. The upper quartile had $650,000 in home equity.
About 40% of people aged 65 and over had virtually no income other than NZ Super and a further 20% had only a little more.
At present, there are two main ways in which people can release the equity in their homes without selling them.
Heartland and SBS offer equity-release loans, also known as reverse mortgages.
People using these borrow an amount of money against the equity in their homes. The amount that can be borrowed as a percentage of a home’s equity increases as borrowers get older, from 15% or 20% at 60 up to an initial loan amount of 50% for people aged 90.
They do not make any payments until the house is sold. Interest rates are usually floating and are currently 10.5% at Heartland Bank and 9.95% at SBS.
Because no repayments are being made and interest compounds, the amount that is owed can increase substantially.
Some products have options that allow homeowners to “ringfence” a portion of their equity to ensure that the entire amount is not wiped out by the loan.
The other, newer option, allows people to sell a share of their home in return for income.
Homeowners sell a 35% stake in their home, which builds at a rate of 3.5% a year for 10 years, to Lifetime Home in return for 25% of its initial value, paid fortnightly or monthly.
This means the homeowner receives an annual income of 2.5% of the current value of their home (less fees) for 10 years. When the regular payments stop after 10 years, the homeowner retains 65% of their home while Lifetime gets the other 35%. If they remain in their home after that time, they pay a fee of $1000 a year. Further equity can also be released.
Retirement Commission policy lead Michelle Reyers said home equity release products appeared to be costlier in New Zealand than in larger markets, but they could provide an alternative source of income less costly than other types of borrowing.
“The key to using home equity release products is understanding the costs and benefits and seeking financial advice to see if they are right for you.”
People taking a reverse mortgage would be better off to withdraw a series of small amounts, rather than a lump sum, she said. This would slow the rate at which interest accumulated.
It would also make sense to explore these options when homeowners were a little older, perhaps 70 or 75.
“Perhaps you have a bit of KiwiSaver, you work for a few years after 65 and, by the time you get to 70, it makes sense to start using these products.
“For the group of retirees relying primarily on NZ Super for income, who have home equity but no other assets to draw down, it is something to consider.”
Her modelling showed people with $600,000 in home equity could draw down $1000 a month for 10 years from age 75 to 85 to supplement their superannuation income by 30% to 50% and still have a “fair amount” of equity left at the end of 10 years.
These options would result in people being able to pass on less of an asset to their children, she said.
“A lot of people want to leave a house to their children and, for those people, a reverse mortgage is perhaps not the right answer. But for other people, they may have supported their children through their working lives to get into a home – they’ve already done that before they reach retirement, so the children are happy they draw it down and live a comfortable life. It depends on the individual and their circumstances.”
Economist Shamubeel Eaqub said it could be a question of trading off a parent’s poverty for an inheritance. “It’s a hard one to sell – somehow it’s okay for your elderly parents to live in poverty and own their own home 100% just so you don’t lose your inheritance. That’s a huge moral dilemma.
“For some people who are asset-rich and cash-poor, this is a really useful tool when they don’t have any other savings ... there is a place for it. If we had more competition it would be cheaper, more affordable, less burdensome than they are currently. But no country has really cracked it, as far as I can see.”
It was a product for a specific problem that would not make sense as part of retirement planning in general, he said.