Repaying debt has become the most common reason retirees take out reverse mortgages, according to one bank.
Heartland Bank passed the milestone of having approved 20,000 reverse mortgages earlier this year, with older homeowners borrowing against the equity in their homes, and only paying it back when they decide to sell up and move somewhere new.
But no longer do home improvements and essential repairs top the list of reasons people borrow against their homes later in life, says Andrew Ford, general manager of reverse mortgages at Heartland.
“Last year, debt consolidation and home improvements were about equal. Debt consolidation has overtaken that,” he says.
“Debt consolidation is now over half of our loans; paying off an existing mortgage, credit card, paying off a personal loan.”
Some extinguish those debts by downsizing, and moving into a smaller home. But others turn to reverse home loans, freeing them from repayments that they are struggling to pay on a low income.
“It can free up their cash flow,” Ford says.
It was traditionally thought that a combination of falling house prices and rising interest rates would see a downturn in demand for reverse mortgages, but rising living costs, and the increasing debts of people in retirement, meant that was not happening, Ford says.
Sometimes the debt is unpaid mortgage debt, says Ford.
Heartland charges borrowers a floating interest rate that can rise, or fall. Reverse mortgage debt grows as interest is added, and the debt compounds over time, but that did not tend to worry borrowers while the value of their homes was rising rapidly, and they were seeing the equity they owned remain on the rise, even as the amount they owed rose.
“These are really unusual times,” Ford says. “Higher house prices really help. Last year we had record inquiry levels, up 65% on the previous year.”
But despite clear signals that house prices are falling, demand for reverse mortgages is not.
“The reason why, at this time, we are seeing unprecedented demand, is inflation,” Ford says. “There’s a need there, and it’s kind of irrelevant what your house price has done.”
Inflation, including council rates rises, are putting a lot of pressure on older asset-rich, income-poor homeowners.
“It’s all very well, if you have an investment portfolio, and you have other income sources, but if you are on NZ Super alone, higher inflation, and higher insurance costs, it’s going to be very tricky,” Ford says.
Money author Martin Hawes says taking a reverse mortgage is a big decision. “To those who have spent a lifetime getting rid of debt, remortgaging the house cuts against the grain,” Hawes says.
“While it would not be my first means of obtaining cash or income, I do think it is a very useful and practical backstop for those who think they are running out of money in retirement,” he says.
The compounding effect can have a big impact.
“If your house was valued at $500,000 and you wanted to take out 20% in the form of a reverse mortgage, the provider would advance you $100,000,” he says.
“Interest would be charged at say 6% per annum ($6000 p.a.) In 20 years’ time when the house is sold, the bank takes back the original $100,000 plus the accumulated and compounded interest of $220,000.”
Heartland says the average loan to value ratio on its loans was 9% at the start of the loan. The most common length of time people had reverse mortgages was 7 to 8 years, and the average age which people took out reverse mortgages was 72.
House price capital gains to offset rising debts cannot be relied on, Hawes says.
Ford says people don’t tend to take all the money at once.
Nine in 10 borrowers arranged a loan, but only drew down on a portion of it, leaving the rest of the approved loan available to spend later, should the need, or desire arise.
Some people used reverse mortgages to fund essentials like healthcare. Others used the debt for luxuries, and once-in-a-lifetime experiences, like one customer who arranged a reverse mortgage so he can attend the 2023 Rugby World Cup in France.
One in five arrange for monthly advances to help pay for living costs, Ford says.
Hawes says some families arrange their own reverse mortgage schemes.
“I have often seen people investigate reverse mortgages and discuss it with the children only to find that one of the children is willing, and has the capacity to step in and take the bank’s role and fund their parents,” he says.
This is a direct reversal of the ‘bank of mum and dad’, he says.
“This seems to me a good outcome provided that the arrangement is properly documented, and all family members are aware of what is happening,” he says.
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