Reverse mortgages are back from the dead. These mortgages, from providers such as Heartland Bank and SBS Bank allow people aged 60 and older to release capital from their homes for spending.
There are no monthly payments and the money advanced to the older person is repaid only when they die, move permanently from their own home, fail to maintain the property or insure it.
Older people are often sitting on a lot of capital, but are cash poor. Grey Power's Bill Rayner knows many people in this situation. His own home, for example, bought in 1978 for $36,000 is now worth more than $1.2m. Yet if he was surviving on NZ Super alone, he would barely have enough money to pay the basics.
"Even a modest loan can snowball. For example a $40,000 loan may be $77,000 in a decade and reach $150,000 in 20 years."
Reverse mortgages get a bad rap sometimes, but the money can improve some older people's lives. Most don't use the cash to live it up. They use the cash advance to replace roofs, get hip operations, buy a car, or add a small amount to their weekly spending, says Wayne Lawrie, reverse mortgage adviser of Senior Solutions.
On the downside, there are risks of:
• Relatives coercing older people to borrow against their homes.
• Compounding interest eating up a lifetime of capital.
• Families seeing "their inheritance" disappear.
Reverse mortgages can be a lifeline, but they eat capital rapidly. Interest rates are typically 1-2 per cent higher than ordinary mortgages, and the interest payments compound, says University of Auckland research fellow Dr Claire Dale. "Even a modest loan can snowball. For example, a $40,000 loan may rise to $77,000 in a decade and reach $150,000 in 20 years," says Dale.
Heartland Bank figures from last year show the average loan was $39,500, which had more than doubled to $84,200. The average property value was $324,700 and the average age 77.8 years.
Just as residents in retirement villages in Canterbury found a gap between the protections they believed they were insured for and what the insurance industry and some retirement villages delivered, so there is a potential for similar gaps to emerge in the context of reverse mortgages.
At the time of writing, Heartland Bank's Home Equity loan had an interest rate of 7.75 per cent, whereas its floating rate was 6.7 per cent. TSB's floating rate was 5.99 per cent but it was charging 7.25 per cent on its "Lifestyle" reverse mortgage. The TSB's cheapest loan was 4.35 per cent for a year.
The banks argue they charge more because they are not receiving the cashflow from monthly mortgage payments. That is true, but at the same time the loan is compounding -- meaning that when payday comes the older person will have proved a valuable customer. The risk to the bank, says Rayner, a retired accountant, is a bit of a "red herring" and he believes the high rates are a form of age discrimination.
The compounding interest does cause disquiet among groups representing older people.
"It feels like usury," says Janferie Bryce-Chapman, executive officer at Age Concern North Shore. "But banks have to pay wages and costs while they wait [for the borrower to die]," she says.
The reality is "if you can't get it cheaper, you can't get it cheaper", says Bryce-Chapman. "I prefer [reverse mortgages] to a loan shark."
As well as the compounding interest, borrowers pay around $2500 in fees and costs to set up the loan. At Heartland that's $895 for the arrangement fee, a valuation charge of either $550 for homes with rating valuations below $1m or $805 for properties worth more than $1 million, and then conveyancing and legal fees of around $1000.
Further drawdowns are charged at $125. Additional advances, once the person reaches certain age limits and can borrow a higher percentage, will require a $295 fee and revaluation charges.
It's cheaper for families to club together and the younger generation go guarantor to help their parents release capital with a regular home loan. But not everyone is in a position to do this.
One of the big complaints about reverse mortgages isn't from the borrowers, it's from offspring who have been counting the value of the parents' home in anticipation of inheriting it. This can be motivated by greed say Grey Power and Age Concern.
"The people who are dissatisfied [with reverse mortgages] are those who are going to inherit," says Bryce-Chapman.
Sadly reverse mortgages are open to abuse by families. The abuse comes in two ways -- either family members bullying their older relatives not to get the loan -- so that they can get "their inheritance" -- or by pushing the older person to take out the loan and hand over the money.
Lawrie cites the example of a son who came home to find his father was looking at a reverse mortgage and bullied him until the father pulled out -- but didn't give him any alternatives to get access to the cash he so badly needed.
"The father was 80-something and was still working to get by and the son wouldn't let the father [get a reverse mortgage]."
Rayner has seen family pressuring an older person to borrow money for them.
"When it comes to repayment it seems to get put back," he says.
Older people have to see a lawyer to take out a reverse mortgage. In a paper written for the Commission for Financial Capability (CFFC) in 2013, Kay Saville-Smith commented that reverse mortgages require a high level of financial literacy and there had been instances of scams in the US surrounding these products. Kin and financial institutions had been guilty of abuse of older people.
Saville-Smith also commented around the idea that reverse mortgages are based on the premise that the value of the property continues to rise.
"But the value of dwellings can also reduce rapidly," she said.
Older people may find their occupation rights are not as protected as they had believed.
"Just as residents in retirement villages in Canterbury found a gap between the protections they believed they were insured for and what the insurance industry and some retirement villages delivered, so there is a potential for similar gaps to emerge in the context of reverse mortgages," wrote Saville-Smith.
Perpetual Guardian ran into this because a client had taken out a reverse mortgage not realising it would affect their will, which had a lifetime interest in the home left to a child. Conditions in the reverse equity mortgage contract required the loan be paid back on death. The child didn't have the money to pay and the house was sold.
Because of the risk of the full value of a property being eaten up by the compounding interest on the loan, New Zealand banks limit what percentage of equity can be borrowed this way. At Heartland, a 60 to 64-year-old can borrow only up to 19 per cent and that rises gradually in five-yearly bands up to the age of 90 at which point a borrower can get up to 45 per cent of their home's value.
Typically, borrowers apply for the maximum entitlement, but don't draw down the entire amount at once, says Lawrie. It means they have access to more money relatively easily and more cheaply than taking out a whole new loan, says Lawrie.
The borrower must fill in annual returns showing they still live in the home and have paid the insurance and rates.