FEATURE: Reversing into unseen wall

KATHY WEBB
Marie Dunningham is furious. She and her husband will have to pay $1794.92 in rates during the next year, and they're set to go up another 9 percent next year.
Ever-increasing rates that take no account of a home-owner's ability to pay, and which outstrip general pay or pension increases, are just one of the things putting elderly people on fixed incomes and tight budgets under severe stress, says Marie, secretary for Grey Power Hastings and Districts. It never used to be that way, she says.
The traditional quarter-acre section that was part of the Dunninghams' $8000 Havelock North property when they bought it in 1966 was valued at $1600. The rates were about $75 a year.
It was relatively easy to pay rates then. Some people even got by with a jar in which they put all their loose change during the year. By the time the rates bill arrived, there was $70-$80 in the jar, and no problem.
Twelve years ago the Dunninghams bought a bit of their neighbour's section for $8000 and added it to their quarter-acre, so all up they've paid $9600 for their back section in an average street.
However, property values have soared in the past few years, and the Dunninghams' section is now valued at $121,000. That has pushed up the rates levied on it by the Hastings District Council to $1795 a year - beyond the capacity of a jar for loose change.
About 80 percent of people aged 60-plus own their own homes - many very modest - but their meagre incomes allow them little spare cash to come and go on.
"And we now have a group of people whose houses are considered to be swanky," Marie says.
Since last month, the Government has raised the maximum rates rebate from $200 to $500, and lifted the cut-off point for eligibility from $7000 of income a year to $20,000.
A married couple on the pension with no other income receives $24,456.64 a year gross.
However, they will still receive the $500 rebate if their rates are at least $1745.62 a year, and they'll receive a partial rebate for rates between $995.64 and $1745.62 a year.
However, even with the rebate, the financial pressure on pensioners trying to pay their rates shows no sign of relenting, even as politicians finally agree to set up an inquiry into the funding of local government.
And the fact is, rates are not the only big worry for the elderly, Marie says. More are finding it necessary to rake up cash for private health services such as hip and knee replacements or cataract removals.
Against this background, a financial service relatively new to New Zealand is being promoted to the elderly as a painless way to solve their cash-flow problems.
Reverse mortgages - where a homeowner borrows either a lump sum or a steady income and doesn't have to make repayments until they die or sell the house - come in a range of structures. They're being advertised or promoted through various avenues including the Public Trust, which receives commission from a company called Sentinel for any "Lifetime Loans" it arranges.
Lifetime loans are income supplements paid out to a homeowner in return for a growing share of the value of the borrower's home.
Grey Power carries advertisements for reverse mortgages in its newsletters, but makes it clear it doesn't endorse them. In fact, it strongly advises members to find an alternative way to raise cash, says Marie.
Companies promoting reverse mortgages present them in simple terms. A picture of a mature man pushing a barrow full of gold bricks symbolises the wealth that elderly people have tied up in their homes. To many, it seems a harmless notion to unlock a bit of that value in return for cash that can make life more comfortable for a few years.
However, reverse mortgages - or some of those available in New Zealand - are ringing alarm bells.
Duncan Watson, a Napier property solicitor specialising in trusts and asset protection, says the mortgages are a trap for the unwary, and a potential "financial straitjacket'.
He's worried that vulnerable people are signing up without getting proper, impartial advice from sources other than brokers who promote the mortgages in return for commission. He's sure that not all those taking out the mortgages fully understand all the implications, such as the hidden but significant extra costs of valuations and administration fees, and the way the deal will quickly erode their equity in a property.
The loans can end up robbing an elderly person of choices later on, when they might decide they need a hip replacement, or it's time to go into a retirement village but discover they have nowhere near enough equity left in their home to raise the money.
Rather than take out a reverse mortgage, elderly people in financial difficulty should talk to their families, who might decide to pay for a parent's hip replacement, or club together and supplement their parents' weekly income, or take out a small mortgage and give the cash to mum and dad in return for a tag on their will giving details of the transaction.
Another opponent of reverse mortgages is investment adviser Gareth Morgan, of Infometrics, who in an article entitled "No Backing Out of Reverse Mortgages" on the company's website infometrics co.nz says New Zealand's lack of a market in long-term debt securities makes "reverse mortgages here particularly dangerous".
"Because the lender has to raise the funds to on-lend to the home-owner, they go to the money market, and in New Zealand that really means the short-term money market. Unlike as in the US for instance, we don't have a secondary market in long-term, fixed-rate obligations such as 30-year mortgages.
"So the reverse mortgage lender must themselves borrow short. That of course opens them up to risk - the risk that interest rates will, over the period before their client exits their home, rise. If they were to do that and the mortgage lender in turn raises the rate charged to the homeowner (which simply is deducted from the remaining equity left in the home), the mortgage lender could find itself exhausting the equity in the house, and with a loss when the house is eventually sold."
Lenders must add an "uncertainty premium" on the interest rate they charge homeowners. That is commonly the Official Cash Rate plus 2.75 percent. At the moment, that adds up to 10 percent, which is higher than floating rates from banks. And if the cash rate goes up, so will the interest charged on the reverse-mortgaged home.
"A mortgage rate of 10 percent chews up remaining equity a lot more rapidly than does the rate of 5 percent charged on similar mortgages in the US, for instance."
Mr Morgan illustrates the point with a hypothetical case. A 65-year-old in New Zealand who borrows 20 percent of the value of his or her house will pay a set-up fee of 4 percent of the house's value, and get to spend the other 16 percent. If house-price inflation is low, by age 77 the borrower's equity in the home will be cut to half. And by age 83 there will be just 22 percent left.
"Nothing wrong with that at all, if you stay in the house until you die. But if you have other demands when you hit 77 - like an operation or care - and you don't have other means, then you're stuffed. Eating 16 percent of the house when you were 65 ended up costing you 50 percent of the house," he says.
People taking out a reverse mortgage in the US get a much better deal, he says. They will pay a fixed interest rate of only 5 percent. At age 78, that borrower could expect to retain 72 percent of the house's equity, and at 83, there's still 66 percent, compared with "22 percent or nothing" in New Zealand.
"The trap with these instruments is that they can eat your capital pretty rapidly, and if you change your mind, or something unexpected arises where you wish to sell your home, there can be a nasty surprise in store."
"Bloody highway robbery," is how Napier property investor Harry Lawson describes reverse mortgages.
"The advertisements are very misleading. They basically play on people's fear. People 65 and over often haven't got a lot of cash. The car and house are paid off, and the reverse mortgage people say 'you are sitting on a valuable asset and we can help you do all the things you want'. If you're 65 and you take one out, by the time you're 75 most of the equity in your house has disappeared.
"The house is the most secure thing you have. A reverse mortgage is the equivalent of frittering away your capital." Many people want to leave something to their children, Mr Lawson says, but going into a reverse mortgage will mean there's little to be left.
Smartretire Ltd, offering reverse mortgages, says on its website that a 1 percent difference in the interest rate can make a big difference. It charges 10 percent interest rate, which is 1 percent lower than some of its competitors and makes a big difference over 25 years: "For example, if you borrowed $5000 upfront and receive $200 per fortnight over 25 years, a 1 percent difference of interest rate saves you $75,539!"
Its website sets out options.
* The floating interest rate is calculated on the basis of the Reserve Bank's Official Cash Rate plus 2.75 percent. So if the cash rate is 7.25 percent, the floating rate for the reverse mortgage will be 10 percent.
* Borrowers opting for a fixed rate will pay 10 percent for the duration of their loan regardless of whether the cash rate rises or falls.
* Another option is what the company calls "bracketed". The interest rate is floating but cannot rise more than 1.5 percent or fall by more than 1.5 percent.