Mary Green* is a 75-year-old retiree who has fought ill health for much of her life. Widowed at age 56, her medical condition meant she could work for only two days a week while supporting three children. There was little opportunity to build up a savings fund. Like many others, Green has found NZ Super payments don’t come close to covering all her needs. So she’s taken out a reverse mortgage, using equity in her Northland home to pay for a more comfortable retirement.
She’s not using the money to fund cruises or install a spa pool: it goes to rates, power, health insurance. And that makes perfect sense to her son, Chris*, a 45-year-old accountant.
“Like many baby boomers, Mum didn’t have the opportunity to save for retirement,” he says. “It’s very simple. It’s a mathematical equation; there’s no emotion involved in it. The pension doesn’t house and feed you; it’s simple.”
Reverse mortgages have an official name, Home Equity Release (HER), and date back many decades. The idea is simple. A loan is taken out against a high-value house, the borrower doesn’t pay interest, which accumulates against the principal, and the whole lot is paid back when the borrower dies or sells the property.
They are offered by a limited number of NZ financial institutions. The sector has grown by $300 million in the past three years, though at $1.06 billion in funds lent (as of November, 2023), it’s a tiny, 0.41 % drop in the total mortgage pool for owner-occupied homes of $259.3 billion and accounts for just .006% of our total housing assets.
The big four banks don’t offer them as a product and it would appear many older people don’t use them, either, despite the need to augment an inadequate pension and the two-decade property boom giving them more headroom.
The stunning rise in New Zealand property prices over the past two decades – only slightly mitigated by the recent correction – would seem to make the case for reverse mortgages stronger than ever.
So, if a reverse mortgage is a solution for a homeowner with limited cash, why aren’t they more popular with lenders and superannuitants? The answers would seem to be societal. Experts says banks don’t want to be seen to be exploiting the elderly – reverse mortgages do come with higher-than-average interest rates, and the longer the mortgage is used, the greater the equity erosion in the value of the house.
Then there’s the kids, nervous to see their inheritance receding. Chris Green agrees that reverse mortgages eroding a future inheritance is less than ideal – “who would be happy about that?”
“But at the end of the day, Mum’s lived a long and fruitful life. She has worked hard all her life, she was widowed at a young age, and this is her money and she deserves to live well.”
He says her state Super, which is about $450 a week, covers her groceries and clothing, coffee with friends and a Netflix subscription. The reverse mortgage gives her a further $1600 a month.
“There’s power, which costs about $300, you’ve got rates of about $350, then health insurance – say $200 a month – car insurance at $150 a month, then phone and internet, which is $150 a month. Very quickly, that gets you through the $1600-a-month instalment from the reverse mortgage.
“This is the reality. There’s no cash in the bank. But it is what it is; there’s no other way around it. You know, Mum deserves to live a good retirement.”
Bad press
Jonathan Eriksen, an Auckland actuarial and investment practitioner, sees the concern of adult children bubble up when reverse mortgages are discussed. He thinks this is another reason banks are wary of them – they don’t want to buy a fight with their customers’ offspring. “It could be years later that the children express dissatisfaction that their parents may have signed up their house for a mortgage and they may not have known about it.”
Reverse mortgages also get a lot of bad press and have had to overcome a very low public reputation. The US state of Florida is popular with retirees seeking a warm climate. But seniors faced foreclosure on their homes when the global financial crisis hit and America’s overheated mortgage market collapsed, taking young and old with it.
Here in New Zealand, a scandal erupted in 2003 when 20 people lost their homes through so-called buyback schemes. This led to eight companies being placed under statutory management and steps taken to rescue the dispossessed homeowners from their plight.
David Tripe, a banking expert and professor, says banks these days are choosy over who they give reverse mortgages to.
“There were people in the past who ended up not knowing what they’d done, and that’s changed. Mortgages are being done with greater care and attention to detail than 20-25 years ago.”
Today’s customers for a reverse mortgage have to be fully informed of the risks – snowballing interest – and are limited on what they can borrow.
The need for more money for retired people was evidenced most recently in a damning report from Age Concern about the rising numbers of elderly people living in squalid conditions, subsisting on a pension. Research from Massey University also points to NZ Super falling well short of real costs. As of June last year, people needed between $193.17 and $902.21 a week on top of their pension to get by, depending on factors including their lifestyle. Inflation is making this problem worse, and KiwiSaver, introduced in 2007 (too late for retirees like Mary Green) and supposed to make up the difference, can be eroded by applications for special grants to meet economic hardship or to help buy a house.
Kiwis aged 61-65 have on average about $53,579 in their KiwiSaver accounts, according to figures supplied by Te Ara Ahunga Ora Retirement Commission. This comes nowhere near making up for the NZ Super shortfall, especially for city dwellers. The figures cover the 2022 year – the 2023 figures will be out in June.
The Industry
Naturally, a loan whose interest is not paid has a way of snowballing, because the unpaid interest is added to the principal. That greater sum then incurs further obligations, which are usually higher than prevailing interest rates.
The reverse mortgage industry’s trump card is property inflation, which has towered over everyday inflation for most of the past 30 years. Property inflation is usually condemned as our economy’s unredeemed bad habit, like smoking. The main arguments against it are that it distracts investment from the productive sector and produces a wealth transfer from the young and the poor to the old and the rich.
Property inflation has, however, benefited a relatively small demographic: housing investors with geared portfolios. So why not use it to help another group: retired people with a valuable home but not enough ready cash?
This has not been happening to any real extent, even though in a booming property market the rising value of a house should be able to outstrip the accumulating value of the loan, like a champion athlete who sprints ahead and can’t be caught by the rest of the pack.
The problems of the past, as evinced in Florida and New Zealand’s own mess, have been averted in other ways. Banks use different financing methods for reverse mortgages and offer low-level loans in the first place. That means years or even decades of unpaid interest are unlikely to swell the total debt to a level close to, or even higher than, the value of the house it is secured against.
In other words, a small loan in the first place would take a long time to become dangerously big. This is made clear in the latest annual report from the company that dominates reverse mortgages in New Zealand, Heartland Bank.
“Conservative loan-to-value ratios (LVRs) have enabled reverse mortgage customers … to weather the challenging combination of falling house prices and higher interest rates,” Heartland Group CEO Jeff Greenslade wrote.
Years of unpaid interest have pushed average LVRs at Heartland Bank to 21.3%, at the last annual report. But the average reverse mortgage had an originating LVR at that time of just 9.8%.
The national median sale price for a house in December was $779,830, according to the Real Estate Institute of NZ. Based on that, a 9.8% reverse mortgage would deliver $76,423, which would be a useful fillip, but would be of limited help if retirement savings were inadequate in the first place.
According to Heartland’s research, the biggest motivation for the 22,000 people who have taken out reverse mortgages over the past decade has been to make their homes aged-friendly, to delay going into a retirement village. The second-biggest reason was to consolidate debt, thanks to a 15% increase over five years in the number of retirees still owing money on a mortgage.
These and other motivations have helped Heartland Group raise its underlying net profit steadily from $76.9m to $110.2m over four years. But that is just Heartland – the mere mention of reverse mortgages seems to make managers of most other banks grow even more reticent than usual.
The biggest banks in New Zealand – all owned by Australian parent companies – are as short on comment as they are on paperwork for reverse mortgages. ASB will say only that it hasn’t offered reverse mortgages to new customers since 2015. ANZ says it does not offer reverse mortgages and “doesn’t have any additional comment to make”. The BNZ does not offer reverse mortgages and has no imminent plans to do so. And Westpac says it regularly reviews its home loan products, but “reverse mortgages aren’t currently part of our range of product offerings”.
Kiwibank says reverse mortgages are not really something it can talk about, given it doesn’t offer them. “We think they work against one of our main purpose-driven goals, which is to help Kiwis get debt-free faster,” said a spokesperson.
Former Westpac executive David Cunningham ran the Co-operative Bank before becoming head of the mortgage brokerage Squirrel, and recalls when Westpac did offer an HER product.
“When I was in charge of products at Westpac 20 years ago, we actually got into the reverse mortgage business for a little while,” he says. “There is clearly a market need in terms of people at the latest stages of their life who are often income-poor but asset-rich.”
Despite that, Westpac did not persist with the product. “Your everyday branch banker isn’t the person to do reverse mortgages – you need a specialist team because of the legal complexities – and what we really found is there wasn’t a lot of demand for the product.”
Another senior banking insider, who did not wish to be identified, says administrative and compliance requirements of reverse mortgages impose high costs on banks that are not always offset by higher margins than for conventional loans. This discourages them from getting involved in the business in the first place. In addition, he says, many young people don’t want to wait until their parents die to inherit their money.
“They say, ‘Would you please sell the house and go to a retirement home or move to something smaller and cheaper and let us have the money now?’”
With attitudes like this, a reverse mortgage, with its steady, ominous tick-tock of debt accumulation, is seen as unnecessary and undesirable.
Jonathan Eriksen sees other problems: interest rates can rise, house prices can fall and life expectancy can go up. These trends can make reverse mortgages extremely vulnerable, he says. None of them is inevitable, but they all carry the risk of making reverse mortgage providers sail closer to the wind than they would ideally prefer. “So that’s another reason for the absence of many banks from the reverse mortgage market.”
And those who remain in the business are always on actuarial high alert when signing people up for reverse mortgages, according to the industry. They take care to give out low sums of money in the first place, to ensure that the value of the loan never exceeds the security value of the property.
Since banks doing reverse mortgages generally offer a guarantee against negative equity, they are clearly protecting their own balance sheet as much as the interests of mortgage holders by keeping initial offers low.
Biting the bullet
The banking industry also comes up against what one member calls “Kiwi psychology” – that people just don’t want to lessen the equity in their property, even if they really need the money.
These varied reservations across a broad front put companies such as Heartland into a powerful position. In early January, it was offering reverse mortgages at a variable rate of 9.98%. That compares with 7.99% for its usual variable mortgages. Two-year fixed rates are generally around 2-3 percentage points below Heartland’s reverse mortgage rate. And this is clearly benefiting the bank, which reports a rise in its reverse mortgage business year after year.
No one is criticising Heartland for what it does. It fills a gap in the market and practises the same careful actuarial analysis required of anyone in the money business.
Heartland’s books show that analysis is being applied meticulously. In three successive annual reports, the average originating LVR on a reverse mortgage has fallen from 10.1%, to 10% to 9.8%. Since the last annual report, it has fallen further to 9.6%, indicating growing caution by company managers about the size of the lending commitments they are making. And where LVRs have blown out to 75% or more in the past due to the compounding effect of unpaid interest, there are currently none of that magnitude.
There is another sign of extreme caution in the reverse mortgage market. Heartland’s analytics show the average age of people taking out one is 78. Since life expectancy is now 84, that means they will have lived most of their post-65 life without a reverse mortgage and are falling back on one only for their final years. This fact joins low upfront sums in keeping total debts ultimately small.
Keira Billot, who manages reverse mortgages for Heartland, says the company had 6867 mortgages at June 30, 2023. “Having those conservative standards has enabled our customers to weather the challenging combination of the slowing house prices and higher interest rates in recent times,” Billot says. She adds there are other protections for clients, such as a guarantee against negative equity and the right to keep a percentage of the house away from the mortgage.
SBS Bank, formerly the Southland Building Society, also offers reverse mortgages. Its rate for reverse mortgages was 9.95% in early January. CEO Mark McLean says reverse mortgages are just a small part of his business – $90m out of $4b of other lending.
“But we think it is a good product to offer, as long as borrowers are really clear and have good conversations with family members so there are no surprises about the level of equity remaining in their house after they have passed.”
McLean has another interpretation of the issue: reverse mortgages may grow faster in the medium term than further into the future because KiwiSaver was introduced only in 2007, so many older people have low KiwiSaver balances. For them, the equity in the house is the only real asset they have. Many younger or middle-aged people will not need them as much – their KiwiSaver balances have grown to be their second-largest asset after their house, which increases their security for their old age.
“So yes, I think reverse mortgages are a positive product, but no, they won’t end up being a dominant product relative to the total home lending portfolio,” McLean says.
The lucky country
The economics of retirement in Australia are dramatically different from those in New Zealand, thanks to one of the most extraordinary politicians of recent decades, Paul Keating. Keating was a bad-tempered brawler from Labour’s right, who basically snarled his way to a wide range of economic reforms. Among them was a compulsory superannuation scheme that has given people large sums of money for their retirement. At June 2021, the average 60- to 64-year-old Australian male had A$402,838 and the average female A$318,203.
Heartland operates in both countries and its analytics show it does far better business there than here. People take out a reverse mortgage a year earlier than in New Zealand and have a significantly higher LVR, 11.7% compared with 9.8% last June.
This is almost certainly because bank managers feel less exposed to risk, since the finances of their customers are buttressed by savings from Keating’s Super scheme.
Alternative model
In New Zealand, the basic model for reverse mortgages is a loan, payable as a lump sum or in instalments, funded by a floating interest rate, which compounds over time. There is an alternative: the so-called Home Reversion Model (HRM). Under this scheme, owners sell a gradual, bit-by-bit stake in their home to a retirement savings company, to a maximum of, say, 35%. That way, they retain a defined share of their home and can enjoy capital gains with no risk of being overwhelmed by a snowballing debt.
A company called Lifetime Retirement Income is planning to launch such a scheme this year, but it has not yet revealed details of how it will work or the metrics it will apply.
Economist Cameron Bagrie believes the reverse mortgage business can only grow, driven by necessity, as people live longer and face rising costs on a limited income. He is an independent committee member of Lifetime Retirement Income and is developing a website focused on reverse mortgages.
“You just need to have a look at some of the stats that are around the corner,” he says. “Inflation per retiree is typically above the general rate of inflation. We know that rates, insurance and electricity are going to be growing well in excess of the rate of general inflation. In 1971, life expectancy was just below 70, but it’s now greater than 80 for males and females, so people have to be able to reasonably fund 15 years-plus of retirement.
“Use of housing assets is going to grow – it’ll have to grow. For a long time, there has been an attitude that you just needed to leave a bit of an inheritance to the next generation.
“I think those attitudes are changing from necessity, because the combination of living longer, and it costing more to live in retirement, means that the savings pool that people have doesn’t go far enough.”
James O’Neill* has a reverse mortgage. The retired Manawatū teacher, 75, needed a new roof and a paint job for his house. He also wanted to visit family members overseas, and to replenish money he had spent over and above his KiwiSaver during his earlier years of retirement.
There was some paperwork – he had to pay for a valuation of his home, which came in well under the level the local council used to assess his rates bill.
Even so, he ended up with a loan of $175,000, which is meeting his needs and he is happy about the result.
“I just feel this weight of financial pressure that has been lifted off my shoulders.”
*Names have been changed for privacy.