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What is a reverse mortgage?

If you’re 60 or older and own a home, a reverse mortgage lets you borrow money for any purpose and not repay the loan or accumulated interest until your home is eventually sold. If you wish, you can also make repayments along the way to reduce the amount borrowed and interest charged. Only some of New Zealand’s banks and non-bank lenders offer reverse mortgages.

This type of loan means you usually end up owning less of your home than you otherwise would, which is why it’s called a reverse mortgage. You should definitely get independent professional advice and make sure you fully understand what you’re signing up to before agreeing to a reverse mortgage. Here’s some more detail to help you get started:

Why get a reverse mortgage?

A reverse mortgage usually suits people who have no mortgage on their home, or only a small loan remaining. They don’t want to sell their home, but would like to borrow some money using the equity they have in it as security. They could get a normal mortgage, but that would mean regular home loan repayments, which they may not want or be able to make.

A reverse mortgage can be a lump sum or drawn down in stages

When people get a reverse mortgage, they usually borrow a lump sum. But some lenders let you borrow in stages or receive a regular payment from the loan facility, up to its agreed maximum. A fee is usually added to the loan for each withdrawal, so be sure to ask about that.

What are the disadvantages of a reverse mortgage?

While a reverse mortgage may help you achieve some goals in life, there are potential downsides to consider. For instance:

  • Lenders tend to charge a higher interest rate than standard mortgages (up to 2% more) and it is a floating or variable rate, which can increase (or decrease) with market rates
  • You pay interest on the interest. These monthly interest charges are added to your loan balance, which has a compounding effect on the amount you owe and the interest charged each time. So at a 7% interest rate, your loan could double in 10 years
  • As with most mortgages, there are fees to consider, including an initial home valuation, set-up fee, additional cash advance fees, mortgage discharge fee at the end and any legal fees that your lawyer charges
  • You have to live in the home, so you can’t move out and put it up for rent
  • If your partner isn’t included as a borrower on the loan document and you die, the house will be sold by the lender because the named borrower no longer lives there
  • You must pay your council rates on time, your home must be fully insured and you have to keep it properly maintained

How much can you borrow with a reverse mortgage?

This will depend on the value of your home and the age of the youngest borrower, if there’s more than one listed. The maximum percentage of the home’s value you can borrow increases with your age. For example, if the youngest borrower is 60, you might be able to borrow up to 15% of the home’s value. But if you’re 90, it could be as much as 45%. That’s because a younger borrower is likely to have the mortgage for longer and so accumulate more interest, which will need to be paid when the home is eventually sold.

What can you use a reverse mortgage for?

What you do with the money is up to you. Here are some of the reasons people choose to get a reverse mortgage:

  • To stay in their home and community while still enjoying a comfortable retirement
  • For home improvements or significant essential maintenance
  • To remove day-to-day money worries
  • To fund travel they’ve always wanted to do
  • To pay for an urgent or life-changing medical procedure or in-home help
  • To repay some or all of a small existing home loan or other debt, so the regular payments are no longer a concern
  • To buy a more suitable, but more expensive, home without having repayments by selling your current home and taking out a reverse mortgage on the new one

Can you get a reverse mortgage on a property that’s not your main residence?

Reverse mortgages can sometimes be used to access the equity you have in other houses you may own, such as a holiday home or investment property. They operate in the same way as a reverse mortgage on your main home.

What if the reverse mortgage plus interest ends up being more than the house is worth?

House prices can decrease from time to time, and this could be significant in an economic crisis. So what happens if the loan plus accumulated interest ends up being more than your house eventually sells for? Will you or your estate have to pay the difference? Most major lenders guarantee that this will not happen, or at least you won’t be liable for the extra if it does. That’s why they only lend you a percentage of its value and why you’re required to keep your home in good order. It’s definitely something to ask about before you sign up though.

Can you ensure some equity is left over when a reverse mortgage is repaid?

You might want to protect some of the equity in your home, so it will definitely be available for you or your estate when your home is eventually sold. Some lenders offer this guarantee, so be sure to ask if it’s something you’d prefer. From the lender’s point of view, this effectively reduces the value of your home to them, so it will reduce the amount you can borrow in the first place.
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