The re­verse mort­gage prob­lem

Kapi-Mana News - - OPINION - ALANAL KNOWSLEYKN

Re­verse mort­gages, also called Home Eq­uity Re­lease mort­gages, have been heav­ily pro­moted, par­tic­u­larly to the el­derly who own their own homes.

They are loans se­cured against your home by a mort­gage, where the loan amount, to­gether with all the in­ter­est on that loan, does not be­come payable un­til you leave your home – eg, if you sell, go into a rest home, or on your death.

For peo­ple living on a mod­est re­tire­ment in­come th­ese loans can en­able un­ex­pected one- off ex­penses to be met, such as hav­ing to re­place a roof or other ma­jor re­pairs, or hav­ing ma­jor surgery.

Home eq­uity loans are much more ex­pen­sive then or­di­nary mort­gages.

Some com­pa­nies cur­rently of­fer­ing th­ese loans charge up­front fees. In ad­di­tion, you will in­cur a house val­u­a­tion fee and legal fees, so you need to be pre­pared for this.

The in­ter­est rates of th­ese loans are sig­nif­i­cantly higher than an or­di­nary mort­gage.

The to­tal in­ter­est payable over the term of the loan is also very much more be­cause it com­pounds, and the loan amount does not re­duce dur­ing the term of the loan, un­like most mort­gages.

A $15,000 loan at 11 per cent com­pound­ing an­nu­ally grows to $ 38,370 over 10 years, and $64,656 over 15.

The over­all ef­fect is that your eq­uity in your home can be quickly eroded by the op­er­a­tion of one of th­ese loans. This might make it dif­fi­cult in the fu­ture to move from your home to a smaller prop­erty, or to buy a unit in a re­tire­ment vil­lage.

In some cases you would be able to take the loan with you if you want to move to an­other prop­erty.

Ob­vi­ously the amount left for your fam­ily out of your es­tate can be se­ri­ously eroded, be­cause of all the in­ter­est mount­ing. What should you do? Be­cause th­ese mort­gages are so ex­pen­sive, we sug­gest the first thing to do is to ex­plore other op­tions.

If your in­come is suf­fi­cient, try get­ting a small or­di­nary mort­gage. That will cost much less over­all.

Con­sider mov­ing to a smaller home now, and re­leas­ing some of your cash eq­uity that way.

Also, see if your fam­ily can lend you the money in­stead. It will be much cheaper and will pre­serve the fam­ily home as an as­set.

If you do de­cide to take one of th­ese mort­gages, shop around first.

Bor­row only the min­i­mum amount you need. You can prob­a­bly take more later, so do not be per­suaded to bor­row more than is ab­so­lutely nec­es­sary.

Talk to your fi­nan­cial ad­viser, lawyer or ac­coun­tant be­fore you make a de­ci­sion.

D and his two sib­lings set up a part­ner­ship and bought a rental prop­erty in the part­ner­ship.

The part­ner­ship took out a mort­gage with a bank to pur­chase the prop­erty.

Their lawyer sug­gested they en­ter into a part­ner­ship agree­ment record­ing, such things as what hap­pened if one party wanted to sell their share of the part­ner­ship, but they de­cided that they didn’t need one as ‘‘they were fam­ily’’.

Af­ter a time, D wanted to move over­seas and to with­draw his share of the part­ner­ship.

He asked the other two if they would buy out his share or let him sell it to some­one else. Things turned sour be­cause his sib­lings couldn’t af­ford to buy him out and couldn’t agree on any other ar­range­ment.

There is spe­cific law re­lat­ing to part­ner­ships ( the Part­ner­ships Act 1908), but it didn’t pro­vide D with much as­sis­tance in this sit­u­a­tion.

If the part­ners had put in place a writ­ten part­ner­ship agree­ment, it could have pro­vided a clear process to deal with the is­sue of buy­ing D out.

Part­ner­ships are not ‘‘ legal’’ en­ti­ties, so part­ners are gen­er­ally per­son­ally li­able for any mat­ters re­lat­ing to the part­ner­ship, and that in­cludes mort­gage bor­row­ings.

This li­a­bil­ity is joint and sev­eral (sep­a­rate), so D would re­main per­son­ally li­able for the mort­gage un­til he was re­moved from the part­ner­ship.

Part­ners hold prop­erty on be­half of the part­ner­ship.

It pays to be aware of your obligations as a part­ner and to make sure you have a writ­ten agree­ment with the part­ners in your part­ner­ship to avoid any dis­putes down the track.

Col­umn cour­tesy of Rainey Collins Lawyers, phone 0800 733484. If you have a legal in­quiry you would like dis­cussed, email aknowsley@rain­ey­collins.co.nz.

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