Home Equity Release (otherwise known as a reverse mortgage) allows older people to access the capital they have in their homes. Many are asset rich but cash poor and could enjoy a better life if they were happy to borrow on their home. There are fishhooks though. Financial advisor Martin Hawes explains.
Some worry about the interest rates these schemes charge, that people could end up losing their homes or significantly reducing their future options. Can you comment?
It’s true, borrowing using home equity incurs greater interest, usually about 2% above variable mortgage interest rates. This is because the lender is not getting payments in cash; rather, they will have to wait until the property is sold. There is also more uncertainty for them. All reputable Home Equity Release lenders will give you a ‘No Negative Equity Guarantee’ so that at no time will you be required to leave your house or your estate be forced to surrender any other money to the lender. If you draw down on your house, your children interest will compound, adding to the total debt to be repaid. Your options can indeed be limited. For example, should you move to a retirement village, you will usually find lenders do not lend on Licence to Occupy premises, which is the most common type of tenure in villages. If you need equity to fund aged residential care, some village operators may offer assistance.
What happens when someone has drawn down an amount under an Equity Release and later wants to move house, perhaps downsizing?
As long as there is enough remaining equity, you could transfer the amount to the new house. However, it would be more likely that the borrower would repay what is owed because freeing up some cash would be one of the purposes of the downsizing and it would make financial sense to use some of that cash to repay the loan.
What do people use them for?
Lots of things. Home repairs and maintenance, access and safety upgrades to the house so they can stay there longer, buying in more care assistance, replacing a car, medical or surgical treatment, or on visiting family/whānau.
What else do you advise?
You should discuss this with your family/whānau or advise them of your intentions, to avoid any potential issues in the future. In any event, older people should not feel guilty about not leaving an inheritance. After all, it is their money. Before signing with a lender, you should get some advice from a lawyer.
Finally, what do you think about older people borrowing from their families, with their home being the security?
Yes, I like children standing in for the bank but it has to be agreed to by the whole family/whānau and then very well-documented. Again, you should see your lawyer.
CASE STUDY: MRS G
Mrs G, an 87-year-old widow, owns and lives alone in her own home. It is worth around $595,000. She has no car and $10,000 in savings. Mrs G has been assessed as requiring a high level of care and receives publicly funded support as well as assistance from her daughter, Susan, who works and lives on the other side of town. Susan is no longer able to help. A reassessment is done and resthome care recommended. Mrs G doesn’t want to live with her daughter or go into a rest home (about $1150 a week). Susan wants to support her mother’s decision. How can Mrs G structure her finances to achieve her goal?
Martin Hawes says: Mrs G could stay at home and use a Home Equity Release to pay for additional care. Withdrawals are structured according to each bank’s level of lending. Depending on the age of the borrower, this could be 20% to 40% of the home’s value. The loans often allow smaller amounts to be drawn down as needed. Over time Mrs G could spend down to the Residential Care Asset Threshold (page 153). Under the residential care means testing regime she would have to spend down to this anyway to be eligible for a Residential Care Subsidy. With agency-supplied help costing $1000 a week, it would take about seven years to spend down to the threshold. Mrs G should hold on to the $10,000 for emergencies.
Disclosure: Due to his support for Equity Release, Martin Hawes has been a paid speaker at seminars run by Sentinel and Heartland Bank, previous and current suppliers of this product. He receives no ongoing remuneration. This article is class advice, not personal advice. Martin recommends you take professional advice for your own situation. Martin is Chair of the Summer KiwiSaver Investment Committee. Summer KiwiSaver is managed by Forsyth Barr. A Product Disclosure Statement is available on request. www.martinhawes.comor those who might inherit will receive a lesser amount. Remember it’s not just the capital you draw down that must be repaid.