What is equity release?

The concept of home equity release involves converting a portion of your home’s value into cash, while still allowing you to live there.

Usually, this is in the form of a reverse mortgage. When you sell the home or die, the full loan plus interest has to be repaid. Currently, the to main providers are Heartland and SBS banks. As this service operates by anticipating the future (which can be very unpredictable), it makes the risk of lending high and the cost of borrowing expensive. Withdrawals are structured according to each bank’s level of lending, for example, a percentage of the home’s value based on the age of the borrower. Once arranged, you have a debt with growing interest. Interest rates are generally floating and compounding so are high and grow quickly.

So, who is this type of arrangement most suited to?

You must be over 60 and mortgage free (or almost). Many Financial Advisors think it is best suited to those who are older (having a shorter period over which interest accrues), and for specific reasons with clearly defined budgets (eg home renovation, access and safety upgrades to the house, buying in more care assistance, replacing a car, medical or surgical treatment).

You must obtain legal advice before proceeding. Your lawyer will ensure that you are clear about the risk and will also ensure that the product contains clauses such as:

• A No Negative Equity Guarantee – ensures you won’t owe any more than the net sale of the home.
• That if you are a couple, you both are on the mortgage contract – ensures that a remaining or surviving spouse can remain in the home.
• Lifetime occupancy guarantee – ensures you have the right to live there for your lifetime.
• Loan repayment guarantee – ensures you never have to make any repayments until you die or sell your home.

The Lifetime Home model

A new alternative to reverse mortgages is the Lifetime Home model, which is available for people aged 70 and above. It's a debt-free equity release model that allows you to convert your property into a steady, regular income stream without taking on additional debt or interest. The model involves homeowners selling a portion of their equity, incrementally, over a specific time, receiving regular income payments over a set period—typically ten years.

For detailed information, and a comparison between this model and traditional reverse mortgages, check out this article on MoneyHub.

Tips before taking out an equity release:

• Your future options will be limited so get independent advice and do your sums.
• Know how different borrowing and interest rate scenarios will work out.
• Avoid borrowing more than you need.
• If appropriate, keep family/whānau informed of your intentions.
• Understand what will be available to your estate.

This article is not financial advice nor a recommendation to buy any product. It is for general information only and any financial products discussed here do not take account of individual personal circumstances and will not be suitable for everyone. You should seek financial advice before purchasing any financial product.