No regret on elderly debt
Reverse mortgages are costly, but let some elderly people remain in their homes, Rob Stock finds.
Rosie and John were left with no choice but to take a reverse mortgage if they wanted to stay in the Christchurch home they loved, with its big garden backing onto a bush-clad reserve alive with birdsong.
Reverse mortgages are a costly blessing to older people who have valuable homes, but not a lot of ready money.
They allow people to borrow money to spend now, that only has to be repaid (plus interest) when they, or their estate, finally sells their home.
But with floating interest rates of 7.45-7.8 per cent, and fees adding up to over $1000, reverse mortgages are more expensive than ordinary home loans.
Rosie and John (who asked Sunday Business not to use their real names) brought their four children out from the UK.
‘‘We didn’t have a lot of money, but we found this house, a fairly run-down old house. We put the kids through university, but we weren’t able to save,’’ Rosie said.
The plan was to start saving hard when the children were educated. That went out of the window when Rogernomics, the overnight financial reforms of the 1980s, saw John made redundant.
He found work, but it was much lower paid, so building a nest egg didn’t happen.
When they got into their late 70s they were struggling. The house needed work, and they needed help keeping up the garden.
They considered selling up and moving to a retirement village, though they didn’t want to.
When they decided to go for a reverse mortgage instead, ’’it took a hugh, huge weight off our minds,’’ Rosie said, but she had words of caution too.
‘‘It’s better to wait. We waited until we were in our late 70s.’’
The reason to wait is that as interest is added to the loan, each year the sum owed to the reverse mortgage lender compounds.
At 7.8 per cent, the floating rate loans are more expensive than ordinary home loans, but then lenders have to wait until the loan is repaid to get any money back, and are required to hold more capital against each loan.
Heartland recently changed its loan minimum age to 60 from 65.
Heartland’s loans have a guarantee that people will never owe more than the value of their homes, but the earlier someone borrows, the longer interest can make inroads into their equity.
The couple’s modest home was in a suburb that gentrified, so it ended up being worth a surprising amount. ‘‘We were the typical cash poor, asset rich,’’ Rosie said.
But even so, leaving the borrowing late keeps down the interest.
Heartland’s online calculator shows that taking a loan of $100,000 on a home worth $700,000 (borrowers have to pay for a valuation), would result in a debt of $217,000 ten years later.
After 20 years, the amount owed would be $473,486.
The risk for borrowers is rising interest rates, and stagnant, or declining prices.
Heartlands Lisa Hatfield says people often take a few months to make the decision of whether a reverse mortgage is for them.
‘‘It’s a really big financial decision,’’ said Martine Milicich from SBS Bank, the only other active reverse mortgage lender.
The average age for borrowers is 72 at Heartland.
The most common use for the money is home maintenance, but travel and paying medical bills also figure frequently. Some pay off what’s left of the mortgage when they stop work.
The daily cost of living is an increasingly important reason, and Heartland now allows monthly payments, rather than people having to draw out a lump sum.
Rosie has no regrets. ‘‘An awful lot of people have this silly idea they need to leave money to their children. If you have put them on the right road to a good salary, what more do they need?’’
The average age for borrowers is 72.