A reverse equity mortgage could help older homeowners.

SBS Bank’s new loan offers flexibility.

With New Zealand slowly emerging from lockdown, attention is now moving from the potential health impact of the COVID-19 pandemic to the economic impact it has had.

There has been a significant impact on the financial markets with many investors’ portfolios experiencing dramatic fluctuations. These changes can be extremely unsettling, particularly for older investors relying on returns to help fund their lifestyle in retirement.

SBS Bank Group chief executive Shaun Drylie says having flexible access to money can be reassuring for many people.

To help homeowners aged over 60 free up some cash, SBS Bank has released SBS Unwind, an updated version of its reverse equity mortgage (REM), designed to offer those aged over 60 the opportunity to gain greater control of their finances and the freedom to enjoy the style of retirement they’ve been planning.

A REM works the opposite way to a standard home loan and takes advantage of the fact owners have equity in their house.

Homeowners aged 60-plus are able to borrow money against the equity in their property. To be eligible, you need to own your home outright or have a standard home loan that is small enough to be paid off by drawing down the REM. The amount of money that can be accessed depends on the age of the youngest resident nominated to live in the property and the value of the home.

Customers don’t have to make regular repayments with a REM. The balance of the loan, which grows over time due to the interest compounding, does not need to be paid back until the property is sold or when the last of two residents nominated to live there moves out or passes away.

Like any loan, interest applies to a REM. The interest rate is higher than normal mortgage rates (currently 6.2 per cent for a SBS Unwind REM) and the interest compounds because no repayments are being made. So, the amount paid back at the end will be higher than the amount borrowed in the first place, Drylie says.

Once the house is sold and the REM repaid, any money left over goes to the borrower or their estate.

“In a traditional home loan, you borrow an amount to buy your home and make regular payments until the principal and the interest charged for that loan is paid off. With a REM, you borrow some of the equity you have in your home without needing to make any payments and then repay the loan when the house is sold, or the last person moves out or passes away,” he says.

If the amount owed to the bank ends up being more than the house value, or what it sells for, the customer or their estate doesn’t have to pay back the shortfall, thanks to a loan repayment guarantee, which applies so long as the customer has met the required terms including keeping up with the property’s rates, insurance and maintenance.

Drylie believes the flexible nature of SBS Unwind will make it an attractive option for many looking to enjoy the retirement lifestyle they planned.

“I think this flexibility is one of the most important points of SBS Unwind because it makes it possible for older homeowners to live more comfortably with less stress into retirement.”

SBS Unwind also addresses a common concern that people have about these types of mortgages – that the repayment requirements will mean their children miss out on an inheritance – by agreeing a proportion of the home’s value to be protected. An $80 Equity Protection Fee applies.

“Knowing that protection is there gives people peace of mind,” says Drylie.

“This isn’t about the bank being in charge, it’s about giving people the chance to create financial independence for themselves.

“During the application process, we ensure the customer understands the implications of what the loan entails and once this has been explained, the customer has to get independent advice from a solicitor, who will further explain the details of the loan,” he says.

“We also encourage discussion between the customer and their family to ensure they know and understand the loan and what it will mean for them.”

To be eligible for an SBS Unwind REM, you need to own your own home outright or have a standard home loan small enough to be paid off by drawing down the REM. The amount of money that can be accessed is determined by your age and the value of your home.

For example, 60-year-olds can borrow up to a maximum of 15 per cent of the value of their home, while for 70-year-olds it’s 25 per cent. At 80, that amount goes up to 35 per cent and 90-year-olds looking to free up some cash can get up to 45 per cent of their home’s worth.

For more information about SBS’s reverse equity mortgage – SBS Unwind – and whether it would be suitable for you, along with copies of Standard Contract Terms and Reverse Equity Mortgage Fees and Charges, visit sbsbank.co.nz or call 0800 727 2265.

“This isn’t about the bank being in charge, it’s about giving people the chance to create financial independence for themselves.” SBS Bank CEO Shaun Drylie