Money matters: Ways ahead on reverse mortgages

Q: Some time ago you mentioned in Money Matters that there were two companies that provided "reverse mortgages" on properties. Would you please provide their details again. My wife and I, who own our own home plus a number of small investment properties, are interested in ways of releasing funds to buy further property and to have as additional cash for holidays etc.

We have a very small mortgage ($70,000) on one of our properties, with total value of $815,000.


A: The two companies are Invincible Life Assurance and TSB Bank.

Invincible was taken over by Dorchester Pacific a year ago, and is now based in Auckland.

You can reach the company on 0800 951-122 or at PO Box 3286, Auckland.

New Plymouth-based TSB Bank offers reverse mortgages of $50,000 or more to customers with premier cheque accounts, but it is not pushing the product at the moment. For information, ring toll-free 0508 562-634 or write to Loan Direct, TSB Bank, PO Box 240, New Plymouth.

The Hibernian Catholic Benefit Society, PO Box 11-632, Wellington, offers reverse mortgages to members.

Each of these providers offers something a bit different. But the basic idea of a reverse mortgage, or home equity conversion loan, is that you can use some of the money tied up in your home.

You get a lump sum, regular payments, or a line of credit that you can borrow against as you need to.

In exchange, the provider gets some of the equity in your home, either when you sell it or when you die and the house is sold.

It's the reverse of an ordinary mortgage in that the amount owed to the provider usually builds up over time.

If you don't pay interest on the loan - arrangements vary - it will still be charged and added to the loan amount.

Because of that, the provider will end up getting more money when your house is sold than it gave you over the years.

Reverse mortgages suit retired people for two reasons. Often, they're not able to make regular repayments on an ordinary mortgage. Also, to put it bluntly, the loan isn't expected to run for too many years before they die.

Reverse mortgages are more widely used in other countries, notably Britain, than in New Zealand. Their complexity, and the lack of public understanding of them, has made many New Zealand companies reluctant to offer them.

Still, they can be a great help to people with valuable property but little cash.

But it could be that an ordinary mortgage will work better.

Interest rates on reverse mortgages tend to be higher than on ordinary mortgages. And whenever you borrow to buy rental property or make any other investment - whether using a mortgage or a reverse mortgage - you should expect the investment to bring you a higher return than the interest you are paying. Otherwise, you're going backwards.

Regular readers would be amazed if I didn't add a warning to you about putting so much of your money in property.

If you won't branch out into, say, an international share fund - to spread your risk - I can only say "Good luck"!

Q: I was in Wellington the week following your article on reverse mortgages and made it my business to call on Invincible Life Assurance to get some further information on Rams (reverse annuity mortgages), as they are known.

The scheme sounded fine until it was mentioned that should I ever need rest-home care, no retirement home or village would consider me if I held a Ram over my home.

My home is valued at $300,000-plus, and I have $170,000 invested conservatively. I am 71 years of age, fit and healthy. I have no dependants and am widowed.

Could you shed any further light on this matter of Rams and if this information is correct, or legal?


A: I'm a sucker. You sent this letter some time back. Then, this week, a copy of it arrived with a Christmas card, and a nice note asking if you had missed my response.

Well, you hadn't missed it because there hadn't been a response. Like many other letters I get, it didn't make it into the column. Not enough room. Now, thanks to your cute card, I decided to include it.

I've spoken to four experts in the area, including Invincible's chief executive, Greg Jones, and nobody says that having a Ram would automatically keep you out of a retirement village or rest-home.

It's true that, if you have a Ram, Invincible gets a claim on some of the equity in your home, just as a mortgage lender does.

When you sell, some proceeds go to the company.

That would obviously affect you if you wanted to go into a retirement village, and planned to sell your home to come up with the money - often around $120,000 to $170,000 - to get into the village.

But you could limit your Ram so that you would still keep some of the equity in your home.

And you've also got your $170,000 of investments. If you're not using that money to live on in the meantime, hopefully it will grow as fast as retirement village prices and get you into a village some years down the track, without your needing any money from your house.

As far as rest-home care goes, if you weren't already in a retirement village, you would probably sell your house when you went into care. Invincible would get its slice of the pie at that stage.

Then, as a single person, you would pay for your care until you use up all but $15,000. At that point, the Government would start to subsidise your care.

For peace of mind, I suggest you talk to a couple of retirement villages and rest-homes that you might want to go to later.

Keep in mind what reverse mortgage expert Judith Davey, of Victoria University, says: "So few people know about HECs because they are so rare. Most rest-homes wouldn't have heard about them, and their natural reaction might be to say no."

So you might need to take a bit of literature with you, including this column, to educate them.

And you should certainly discuss your concerns with Invincible, and make sure you're not going to lose more of your home equity than you feel comfortable with.

Having done that, though, I don't see why you shouldn't get a Ram, and go ahead and enjoy the money.

Q: I see ads in the paper offering "free" entry into unit trusts. That word "free" frightens me. Nothing is free Somebody pays Me?

Why would the unit trust forgo its entry fee? Perhaps the intermediary collects something that otherwise I would get?


A: How could you be so suspicious? Well, quite easily, actually. As economist Milton Friedman said: "There's no such thing as a free lunch."

In this case, though, there's nothing sinister going on - at least if you're referring to the MoneyOnLine ads that run regularly in the Weekend Herald.

Basically, the company's discount service doesn't give advice to investors, which keeps its costs down. It gets less commission per customer, but hopes that by offering a good deal it attracts more customers.

There are two types of fees that are relevant here - entry fees and trail commissions.

Most unit trusts charge a 0 to 5 per cent entry fee and then give that money to the financial adviser, broker or other "intermediary" who got the investor into the fund.

Usually, you can't get around it by going directly to a fund. In that case, the fund managers still charge the fee but keep the money themselves.

Some advisers, particularly those who charge by the hour or are compensated in some other way, pass some or all of the entry fee back to the investor. And MoneyOnLine passes the entry fee back too.

Once you're in the fund, most fund managers pay an ongoing trail commission to your intermediary. It ranges from 0.2 to 0.5 per cent a year, and is often 0.25 per cent, says John Commins of MoneyOnLine. This is what his company gets, as payment for serving you.

If you invested in a unit trust via some other intermediary, the trail commission might be rebated to you. But that would happen only if the adviser was being rewarded in some other way, perhaps by charging you an advice fee or monitoring fee, says Commins.

Whatever the arrangement, the intermediary is going to want some piece of the action.

For more information on fees and how MoneyOnLine makes a living, go to its website. Click on Personal Financial Services, then Discount Brokerage Service, then Brokerage and Commission.

At least one other company, NZIJ Stockbrokers, formerly Reuhman & Co, offers much the same website service.

* Mary Holm is a freelance journalist and author of the newly published Investing Made Simple. Send questions for her to Money Matters, Business Herald, PO Box 32, Auckland; or e-mail: maryh@journalist.com. Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number in case we need more information. Mary cannot answer all questions, correspond directly with readers, or give financial advice outside the column.

* This is the final Money Matters column for 2000. Mary will be back on January 20.

Links


MoneyOnLine

NZIJ Stockbrokers