Help yourself to the equity
Homeowners who are millionaires on paper can still experience hardship unless they find ways to release that wealth, writes Susan Edmunds.
Rising house prices have made thousands of people millionaires over recent years – at least on paper. Half of Auckland’s houses are now worth at least seven figures, while two Wellington and two Christchurch suburbs also have average values of more than $1 million.
But for homeowners approaching retirement, having a pricey house is not much consolation if you do not have money in the bank. More than half of all people over 65 earn less than $25,000 a year. Many rely on the pension alone.
If you are wondering how to turn equity in your house into cash in your hand, there are a few options.
Move to a different area
It might sound drastic, but shifting to a cheaper area can significantly boost your bank balance.
Retirees who move from Seatoun, in Wellington, with a median price of $1m could shift to Kapiti Coast, where median values are about half that, and bank $500,000.
Research by the ANZ Retirement Savings Barometer showed one in five Aucklanders planned to leave the city when they retired.
Across the North Island, 12 per cent planned to move towns. In the South Island, 16 per cent said they would move after 65.
David Boyle, the Commission for Financial Capability’s group manager of investor education and retirement villages, said there were wellbeing issues to consider for people planning such a move.
He said people might need to consider the community and family networks they had built up in their areas, and how they would manage without them.
Proximity to healthcare services might also be an issue.
‘‘But many older New Zealanders have family spread out around the country, or the world. If they are going to live 20 or 30 years or longer, that’s a good length of time to build up new relationships.’’
He said many Aucklanders were moving to Northland, Hamilton and Tauranga, which had affected property prices.
Downsizing
If the kids have all left home, you might consider shifting to a smaller property.
Trade Me Property data shows the average asking price of a threeor four-bedroom house across the country is $605,050.
But sellers of houses with one or two bedrooms are only asking an average of $393,750, and $421,500 for units.
The ANZ survey showed 25 per cent of people planned to downsize.
Moving to a retirement village can be another way to get a smaller property.
Retirement Villages Association executive director John Collyns said people released more equity when they moved to a retirement village than when they moved to a standard property.
He said it was typical to release $50,000 when moving to a village. One in five had more than $200,000.
‘‘Retirement village residents have more cash in hand after the move than do people who continue with home ownership, albeit in a smaller unit than their family home,’’ Collyns said.
He pointed to CRESA research showing that 80 per cent of retirement village residents paid between $200,000 and $400,000 for their unit, compared with 45 per cent of unit owners.
If you are considering a retirement village, it is important to determine whether you are paying for the property outright, or just buying a licence to occupy.
With a licence to occupy, you miss out on capital gains and may not get all of your purchase price back when you move out.
Reverse mortgages
The idea of taking out a loan when you are no longer earning can be scary. But there is growing interest in reverse mortgages.
Borrowers using a reverse mortgage take out a loan which is secured against their homes. But instead of the borrower making repayments, the amount owing grows as interest is added to it. The total amount is then paid off when the house is sold.
These loans are relatively painless when properties are increasing in value more quickly than interest is accumulating on the loan. But if prices stagnate, or fall, it can be a problem.
Lisa Hatfield, national manager of Heartland Bank, said the average age of her bank’s reverse mortgage borrowers was 77.
The bank recently lowered the age of eligibility to 60 and she said that had prompted a lift in interest among people heading into retirement. People usually wanted to borrow for things such as renovations, travel or medical expenses.
Loans are issued on homes in main metropolitan areas, for up to 40 per cent of the property’s value, depending on the borrower’s age.
Hatfield said Heartland’s average loan was $50,000. The bank has $374m in outstanding reverse mortgage loans, at an interest rate of 7.5 per cent.
The suitability of a reverse mortgage would depend on individual circumstances.
If there are other assets available, it could be preferable to use those first, Hatfield said.
But some people found it stressful to use up all their savings and preferred a loan.
Borrowers can draw down $10,000 initially and have the rest of the loan available as needed.
There is also an option to set up a monthly payment directly into their account, from a minimum of $300 a month for five to 10 years.
‘‘We launched this feature in an effort to offer seniors more flexibility in how they access their funds and we have certainly had some interest,’’ Hatfield said.
It is also possible to protect a portion of the equity in the home, so that no matter how big the loan
If you are considering a retirement village, it is important to determine whether you are paying for the property outright, or just buying a licence to occupy.
gets, there is something left to pass on when the house is sold.
SBS also offers a reverse mortgage product. ASB closed its HomePlus reverse equity release product to new customers in 2015.
Boyle said whether a reverse mortgage was appropriate would depend on client circumstances.
He said many people were worried about the idea of losing the equity they had built up in the house. ‘‘But if you can’t put your heater on because you can’t pay your power bill – if you’ve got no income to meet that, it could improve your wellbeing in retirement.’’
Sell and rent
‘‘You could go to the other extreme and just sell your home and rent,’’ Boyle said. If it became possible to secure longer-term tenancies, this could become a more viable option for retirees.
‘‘If you sell your house for $1m and pay $300 a week in rent, that would last quite a long time.’’
He said one of the biggest drawbacks for a lot of people would be the possibility that they could be required to move.
‘‘Having certainty, whether you’re renting or owning, is pretty important. The last thing you want is to have your house go out from beneath you.’’
Get the kids involved
Boyle said another option was to get children to buy into a property.
This would help ensure the house was maintained and looked after, he said.
‘‘In lots of cases, parents want to leave something and that’s normally the home. But I’d hope children also want to see their parents enjoying life in retirement. If family members can work out an agreement to cover costs, it’s definitely a possibility.’’
It could mean the younger generation taking out a mortgage and giving their parents a lump sum that could be invested to provide income, he said.
The deal would need to be transparent, and all parties would need independent advice, he said. ‘‘Where money is invested, it can change the dynamic quite a bit.’’
Boyle said there needed to be more options to help people manage their retirement income needs.
‘‘It comes down to having good information and getting good advice, and determining what’s best based on your personal needs.’’