Increasing in popularity
The current combination of increasing living costs, rising house prices and low interest rates has seen more than property-seekers signing up to home loans. On the other side of the coin, some older homeowners are seeking ‘reverse mortgages’ from their lenders in order to release the growing equity in their property.
What is a reverse mortgage?
A reverse mortgage is a lending structure that allows you to access the equity you have accumulated in your home or other property. With a reverse mortgage, you borrow money from a lender using your existing home as security in order to, for example, supplement your living costs or complete renovations rather than for the purpose of acquiring a new property.
In essence, a reverse mortgage is a home loan than operates slightly differently from other home loans.
The specific terms and conditions of a reverse mortgage will depend on the loan agreement you sign. However, the terms of a reverse mortgage often include the following:
- No repayments are required until your death, your home is sold or you stop living in your home. This avoids your loan being a day-to-day burden, but it does mean that your loan will only increase over time as the equity is released and interest accrues.
- The interest rate is often at the lender’s variable rate which is higher than the fixed rates available for other types of home loans. Variable interest rates are low now, but you may see your interest rate increase significantly before the end of your loan term.
- The interest on the loan usually compounds monthly. This means that if you are not making repayments, your interest will be added to the balance of your loan at the end of each month.
- As security for the loan, the lender will require a mortgage over your home. This mortgage will give your lender the ability to – in a worst case scenario – force the sale of your home if you do not repay your loan when required or you otherwise breach the loan conditions
How can your interests be safeguarded?
While a reverse mortgage may provide short-term cash flow, it also can have significant consequences for your long-term retirement plans. You should ask for financial advice to ensure the reverse mortgage will not prevent you fulfilling any other plans you have – such as the funds you need for rest home care. There may be other options – such as selling your home and downsizing – that would be better suited to your plans.
A reverse mortgage is subject to the standard legal protections around a consumer credit contract, such as the requirement that your lender discloses the terms of your loan to you before you sign.
However, not all loan contracts are alike. You should talk with us about the specific terms of your loan to make sure, if appropriate, that:
- You can continue living in your home if your partner/spouse moves out or dies
- Your lender will not require repayments except when you die or when you move out of your home, and
- There are limits on the amounts you can borrow so that your loan and the accrued interest does not exceed the value of your home (meaning that the remainder of the loan must be paid out of your savings or other assets).
Talk with your family
You should think about talking with your family before signing on the dotted line with your lender. A reverse mortgage will reduce the amount available for your family’s inheritance. Addressing your children’s expectations early will help avoid unexpected surprises for them later.
Reverse mortgages can be a saviour to older people who are asset rich but cash flow poor. There are, however, a number of fishhooks for the unwary. If you are considering a reverse mortgage, do be in touch with us so we can help you look at options to free up equity in your home.
DISCLAIMER: All the information published in Property Speaking is true and accurate to the best of the authors’ knowledge. It should not be a substitute for legal advice. No liability is assumed by the authors or publisher for losses suffered by any person or organisation relying directly or indirectly on this newsletter. Views expressed are those of individual authors, and do not necessarily reflect the view of this firm. Articles appearing in Property Speaking may be reproduced with prior approval from the editor and credit given to the source. Copyright, NZ LAW Limited, 2021. Editor: Adrienne Olsen. E-mail: adrienne@adroite.co.nz. Ph: 029 286 3650.
