Reverse mortgage eats into couple's equity leaving them with limited choices. Photo / 123RF
OPINION:
Q: A few years ago we took out a reverse mortgage and bought a motorhome, which we have used a lot. Recently we have considered moving to a retirement village, but find that the mortgage has grown significantly and eaten into our equity such that our choices are somewhat limited.
I would suspect that most seniors who reverse mortgage their homes will some day want to downsize or move to a retirement village, despite the banks’ publicity to enjoy staying in their own home.
We needed to realise that these mortgages can severely reduce or even eliminate the choices available.
A: A 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 other main 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 10 years. The calculator on Heartland’s website assumes that growth will average 3 per cent.
In the table, our $1m house grows to $2.43m in the 30 years from age 65 to 95. So even though you will owe $1.71m, 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:
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.
Q: We haven’t seen the subject of reverse mortgages in your column for many years.
Our situation must be very typical: mortgage-free home, valuation heading close to $2 million, but only about $500,000 in savings to speak of. No kids, brothers and sisters better off.
At 75, we want to see life through comfortably, but not deprive ourselves of what we feel we have earned, like travel and reasonable cars etc.
We like our home, a bit challenging at times, and don’t really feel the need to go into a village just yet.
When reverse mortgages first came out, the “respectable” banks said they wouldn’t have a bar of this barbaric practice, but we suspect that they are very common with people in our situation.
Appreciate your thoughts on what the balance of this is all about Mary.
A: Rule 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 6700 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 last year. 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.
Q: I had a term deposit mature on April 16, and saw my bank (BNZ) offered publicly one year at 5.60 per cent. I went online to the bank website and saw they offered 5.70 per cent for one year, which I took.
Then on the 19th they offered publicly one year at 5.70 per cent. Online they offered 5.75 per cent, and since it was within the five-day “cooling-off period”, I asked them to cancel my term deposit and reinstate it at 5.75 per cent — which they did.
Thus, by not taking the initial public offer I will now receive over $525 extra compounded just for keeping abreast of the bank’s ongoing offers within the cooling-off period, which practice I heartily recommend.
A: Other 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.
Q: In last week’s column you quote a reader who has the confidence to purchase shares without using a broker. Could you share the secret? I have found no way of buying or selling shares that does not involve an intermediary “clipping the ticket”.
This irritates me intensely, being charged for something that involves minimal effort, and I would welcome advice on how to avoid these charges.
As far as I am aware, one cannot buy shares on the NZX in the same way that one buys a tin of baked beans, and even then the retailer is taking a profit.
A: Last 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 your own investments much more cheaply and easily than in the past. There are also other platforms through which you can invest in share funds.
Since mid-April, to mark the 25th anniversary of this column, we have run some readers’ stories of how the column has helped them over the years. Here’s another.
Q: I am a 73-year-old retired health sector worker. At the age of 52, I divorced and needed to pay my husband out half of the house — our only asset.
I scraped some money together but had to take out a $210,000 mortgage. I got a 30-year loan. I would joke at work I’d be that fossilised therapist in the corner poking them with a walking stick!
Following your advice over the years, I took up the government’s KiwiSaver offer and employer’s dollar-for-dollar savings, always upping my input when I had a pay rise, maintaining input to the mortgage at the same level as interest levels dropped, bargaining in person with the bank manager when negotiating a new fixed rate.
I reviewed outgoing costs regularly. I made a one-bedroom flat on the side of my house, maintaining and upgrading it after a tenant left.
I paid off the mortgage in 15 years, giving me time to redo paths, reroof and paint the house before retiring at 70 years old. I have saved $30,000 for a rainy day, have a pension and flat/ boarder income. Travel overseas, read, laugh and have a great life.
With your steady hand and advice I made it! I read your column every week and laugh out loud when I read of people with hundreds of thousands in the bank and in property, scared of losing it or not travelling and worrying about this and that.
I can think of so many things they could do with their money to benefit others less well-off than themselves.
I love your humour and sensible approach, you have been a friend indeed to me. This letter is my opportunity to say thank you, thank you for your help in making my life happier and enriched.
A: What a wonderful, heart-warming letter. Thank you. In turn, I love your positivity and creativity — and your attitude to money.
The best bits of your letter:
- Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.
OPINION: Improving financial literacy is vital for New Zealand's small businesses to grow.