A growing number of Kiwis are borrowing against their houses to fund their retirement. Photo / File
A rising number of New Zealanders are eating into the equity in their homes to fund their retirement as the cost of living surges while returns on savings in the bank have hit record lows.
Heartland Bank, one of only three providers of reverse mortgages in the New Zealand market, saw a 70 per cent increase in new business for the product in the four months to October 31, compared to the same period last year.
While it won't disclose the number of people which took out reverse mortgages its annual result shows its reverse mortgage portfolio grew $42 million to $602m in the year to June 30, 2021 with an average loan size of $109,417.
Reverse mortgages allow people close to or in retirement to borrow against the value of their home with the loan only required to be paid back once they sell the house or pass away. Borrowers don't have to make payments but the interest compounds during the period of the loan.
Andrew Ford, Heartland's general manager – reverse mortgages, said rising house prices had helped boost the number of people taking up the product which it offers to those aged 60 and over.
"People have got great equity in their property. For older homeowners they are able to release some of that equity without having to sell the home - with a higher-value property that is a more appealing proposition."
Ford said low interest rates were also a driver in two ways.
"For those retirees that relied on interest on term deposits, they are getting lower interest so are less able to supplement their retirement income and on the other side reverse mortgage interest rates are lower so the loan grows at a slower rate. The demographics of the ageing population and increasing indebtedness in retirement means that people are looking for a solution."
Ford said most people drew down a modest amount upfront and used it for things like home improvement, debt consolidation, a car or a medical expense.
Others used a cash reserve facility which could be taken out for future needs like unexpected expenses or a monthly advance to supplement New Zealand Superannuation.
Ford said a survey it undertook through the Grownups website of 2000 people found 88 per cent said NZ Super was not enough to make ends meet and by topping it up with an advance from a reverse mortgage it could take the stress out of everyday expenses.
Financial adviser Liz Koh said she had observed a definite increase in demand for the product.
"That is just reinforced by the latest retirement expenditure guidelines that came out from Massey University the other day which shows this widening gap between NZ Super and what you need to live on.
"People aren't necessarily prepared for that. We are seeing a lot more people come to retirement with mortgages still and/or renting as opposed to owning a home. Housing costs are definitely on the increase and for those people with mortgages the interest rates are all going up as well so it is a perfect storm really for retirees at the moment."
But they don't come without some risks.
Koh said one risk was the interest rate on the mortgage was not fixed.
"Over time as interest rates increase, the interest rate will rise but, in saying that, if interest rates are on the rise quite often that is linked to a rise in house prices as well so they tend to go in tandem."
She said in her experience she had found the increase in the value of the property over time offset the interest that was paid because borrowers were only allowed to borrow against a certain percentage of the value of the house.
"The amount you can borrow is determined by your age and the value of your home.
The value of your house is increasing by a factor of 100 per cent of the value of the house whereas the interest rate is only accruing on a fraction of that and so over the longer term one offsets the other.
"But of course there is a risk that may not happen. You could get an unusual situation where interest rates went up and property values went down."
Heartland has just increased the loan-to-value ratio on its reverse mortgages, meaning borrowers can now borrow more against the value of their property.
Previously, a 70-year-old could borrow up to 25 per cent of the value of their property but that is now 30 per cent, while for those 80 and over it has increased from 35 per cent to 40.
Its maximum is now 50 per cent of the value of a property, up from 45 per cent, although Ford noted the average initial LVR in the 12 months to September 30, 2021, was 9 per cent.
Koh said the other thing to watch out for was if the borrower planned to move into a retirement village.
"Usually you can't take a reverse mortgage with you so you have to be mindful of having enough equity left in order to make that move.
"If you sold your house to move into a village you would have to repay your mortgage and then buy into the village with whatever the net proceeds are."
Koh said, generally, reverse mortgages were not allowed on right to occupy licenses which people buy into for retirement villages.
If they were allowed then it was usually at a much-reduced amount that people could borrow, she added.
"The way to manage that is to really only borrow on a reverse mortgage what you absolutely need to borrow. You can set up a limit of what you can borrow up to but you don't have to borrow all of that at once. Then you just take out money in lump sums when you need it. Just be abstemious with your spending so you don't cut off any options down the track."
Koh said one of the big challenges could be from family members who stood to lose out on an inheritance.
"I think it is important to discuss it with your family but at the end of the day it's your choice. I don't think you want to leave any nasty surprises for your family - you don't want to clock up debt and there's the family thinking they are going to inherit a million dollars when your house is sold and oops there is only $800k or less because you have got that mortgage there.
"You need to tell your family what you have done and perhaps give them the option to lend you money instead but at the end of the day it is your right to do that."
Koh said reverse mortgages could be a good idea for some people but it was not a case of one size fits all.
"My philosophy on it is that you shouldn't be afraid to use a reverse mortgage if you find yourself in a position where you are unable to release equity from your home, unable to borrow from family and you have used up all your retirement savings.
"Why should you sit in your home mortgage-free in order to protect an inheritance for your children and in so doing live a miserable retirement? It is just a balancing act between your own needs and the needs of the beneficiary of your estate."
Tom Hartman, personal finance lead at Sorted, said, in general, its advice was that reverse mortgages were a controversial product and should only be entered into after robust legal and financial advice.
"They can make more financial sense when property appreciates steeply over time, although this is not always the case and cannot be predicted with certainty.
"If you find yourself in the position of being asset rich and cash poor, downsizing and possibly a reverse mortgage may be your only options."
He said the best way to avoid this situation was by planning, diversification and investing at least some of your funds in a flexible way.
The reverse mortgage market is still tiny compared to the traditional mortgage market which hit $319.2 billion in loans at the end of Setpember, according to Reserve Bank figures.
How many people had paid deposits was not stated but pre-sales said to be 'strong'.