Reverse Mortgages

It may have been recommended to you to take out a Reverse Mortgage if you need funds and your capital is nearly all tied up in your house. The reason may be that you are considering renovating your property or visiting your children or grandchildren overseas or have some other need or project in mind and you do not qualify for the usual form of mortgage from your Bank.

How do reverse mortgages work? They are loans where interest does not have to paid during the lifetime of the borrower, which of course sounds attractive. However, the interest is still charged, also it is charged at a higher rate than for normal mortgages, and also it “compounds”. What this means is that quite a small loan can add up over time to a very large debt, much bigger than would be the case for a normal loan. These loans are still of course loans secured by a mortgage like other “mortgages”.

We do not recommend reverse mortgages in other than very exceptional cases. This is because there are many expensive downsides to them, and more often than not, if there is a need, there is a more satisfactory way of providing funding which doesn’t have the same negatives. If you are considering a reverse mortgage we would be very happy to discuss the implications, and also the alternatives, with you before you take one out, and, if you wish, with those family members who will be affected by it.

If you are over 60 and own your own home you may qualify for a Reverse Mortgage.  The amount you are able to borrow depends on the value of your home and your age.

If your home is owned by a family trust, all the trustees would need to sign the application form and the loan documents.

The mortgage provider may lend you a minimum sum of $10,000 with top ups of $5,000 or more available.  If a couple are borrowing, the age of the youngest person will apply. The loan is repaid when the house is sold or when you die.

• At age 60 you can borrow up to 15% of the current value of your home.
• At 70 this increases to 25%.
• At 80 it goes up to 35%.
• At 90 and over it goes to 45%.

You can (for some more cost) set up the loan so that a set portion of your home’s current value can be ‘protected’ for your estate. Most providers will guarantee that your estate will not have to pay more than the sale proceeds of the house. However, for this to happen you must have complied with all of their requirements.

Your estate will be reduced and may be greatly reduced. For this reason we recommend that the loan be discussed with your family, they may be in a position to lend you the funds at a better interest rate.

Depending on the amount borrowed, the equity in your home may reduce to the point where you will not be able to purchase a retirement unit if that is your long term plan.

Borrowers have ongoing obligations to the loan provider to maintain insurance and maintenance and allow regular valuations to be carried out by their staff.

The mortgage contract will include provisions requiring you to maintain the property. If you do not, the provider, after giving you notice outlining your failure and requiring you to remedy it, can exercise its right to enter the property and take possession if they are concerned that it is not being maintained and their interest in the property is at risk.

As the amount you borrow is based on your age and the value of the property, the ‘softening’ of the housing market will mean you may not be able to apply for a top up later on. The providers are currently advising people to only borrow what they need.

If you currently already have one and would like to reconsider by all means ask us about alternatives which may be available to you.