A reverse mortgage won't be right for everyone. Photo / 123RF
OPINION:
Q: Want to become a millionaire? With this simple and to-the-point method, you’ll be making money faster than you can say “abracadabra”.
Much Love.
A: Thanks for the umpteenth email offer that I find remarkably easy to resist.
The only reason it made it into the column is that it’s the first time such an offer has come with much love. It almost won me over, but ...
Q: I was interested to read about reverse mortgages in last Saturday’s paper. A couple of years ago I had a shortfall for a short while, so a reverse mortgage worked perfectly for me.
My permanent dwelling (a mortgage-free apartment) and a holiday home are held in a family trust. I had the opportunity to buy a more suitable holiday place to accommodate a daughter with chronic health conditions.
The trust had $180,000 on term deposit with 6 or 7 months to run, which would have cost $13,000 to break, so I took out a reverse mortgage for about 6 months.
There was a great deal of paperwork involved, particularly as it involved another trustee, but I did not mind as the bank (Heartland) needed to check me out properly, and they were taking all the risks.
Certainly the interest rate is higher than the normal for a mortgage, but they get no return until the end, whatever that may be.
All up, it probably cost around $6000 for the setting up (valuation of my apartment etc.), compounding interest, fees etc., but I was grateful to find a solution, as at age 78 I would not have any other way to raise the money.
A: Thanks for a good example of another use for a reverse mortgage, which is a retirement loan on which you make no repayments until the loan ends.
Because you were certain you would have the term deposit money when it matured, there was no risk that you would end up with a longer-term loan — with its compounding interest — than planned.
Q: I am an 80-year-old woman living in a mortgage-free apartment in Auckland. My only income is from NZ Superannuation.
Body corporate fees and council rates are my main expenses, approximately $9000 a year. I need to set up a reverse mortgage Asap.
Would it be wiser to borrow a lump sum, say $10,000 initially as I have no emergency funds, or a regular monthly sum?
Which would be less expensive, SBS or Heartland Bank?
A: A reverse mortgage could work well for you.
At your age it’s highly unlikely your loan will compound for more than 20 years — sorry! Also, you’re not looking to borrow heaps.
But first, let’s look at another option: rates postponement. This is available from many councils around the country — check their websites or contact them.
In some places, only people on low incomes are eligible, but Auckland is among the councils that don’t have an income test — although there are rules, including that you must live in the home.
Rates postponement is different from a rates rebate, which is a reduction in rates for lower-income people. A postponement is like a mini reverse mortgage. Instead of paying your rates, you run up a debt that is repaid, in most schemes, when you sell the property, move to residential care or die — although you can choose to repay the loan sooner.
“If your rates bill gets near the value of your property — many councils say 80per cent of the value — they usually stop letting you defer your rates. The action they take varies from one area to another, but you might have to sell your house to repay the rates,” says the Department of Internal Affairs, at tinyurl.com/PostponeRates. In many cases, though, your debt wouldn’t get nearly that big.
Councils charge interest and other fees. For example, Auckland Council says, “The postponement fee will include the council’s annual borrowing rate (currently set at 4.90per cent)”.
I suggest you ask the council what your total costs would be. If, as I would expect, they are lower than for a reverse mortgage, go with rates postponement. Then, if you still need a reverse mortgage to pay your body corporate fees or other costs, it will be for a smaller amount.
Don’t start with a lump sum reverse mortgage. It’s important to borrow only as much as you need, to keep the compounding interest as low as possible. You could set it up so you receive a monthly amount for your regular expenses, and also get access to emergency funds when needed.
On SBS versus Heartland, the SBS interest rate is currently lower — at 9per cent versus 9.5per cent — but that won’t necessarily last. You also need to compare all the fees involved, which will be added to your loan.
“There are a range of fees charged, from upfront home valuation fees, application fees, drawdown fees and mortgage discharge fees — these together can easily top $2500, and there are other fees that can be applied on top of these,” says MoneyHub, which has a helpful guide here: tinyurl.com/RevMortgages.
You wouldn’t have to come up with the $2500. It would be added to your loan.
The guide includes other options you might want to consider. It’s pretty negative about reverse mortgages, which is good really. Read it, and if you still want to go ahead, the product is probably right for you.
I would ask both SBS and Heartland to calculate all your costs, read their conditions — which are fairly similar — and then go ahead.
A final thought: The lender of a reverse mortgage might object to your using rates postponement as well. If you expect you will need to use both, check with the reverse mortgage lenders before you start on rates postponement.
Q: Why did last week’s correspondent waste time with BNZ term deposits when SBS and TSB consistently offer better interest rates on investment accounts? Results are published weekly next to Mary’s column.
A: A glance at last week’s list shows the smaller banks don’t necessarily offer higher rates for every term. But it’s certainly worth checking them out. For more info and other terms, go to interest.co.nz.
Since mid April, to mark the 25th anniversary of this column, we have run some readers’ stories of how the column has helped them over the years. Here are two more.
Q: A decade ago, I had an accident and my life as I knew it fell apart overnight. I wanted to keep my house but with no income or savings, the only way was to rent my house out. I chose to let my house fully furnished as I had no storage. Luckily, I was able to move back to my parents as I needed help with rehabilitation.
I started reading your column every week. Then I laddered my mortgage and worked on paying 5per cent off the smallest amount each year without penalty. I started a balanced KiwiSaver fund at 3per cent once I could spare that money.
Last year I became mortgage-free, so then I started saving an emergency fund, which I have put in laddered term deposits over a one-year period, so every month I will have money should I need it. My next goal is to diversify more with monthly index fund payments through various Smartshares.
I am more financially secure now than a decade ago, and your column has been invaluable in achieving this security. Thank you so much Mary.
A: It’s a great pleasure to read of your turnaround. You’re doing brilliantly.
Q: I have been reading your column, probably for the 25 years it has been published.
It must be around 20 years ago or so I read in one of your columns where you advised people not to put their deposit for buying a house at risk.
I was lucky to receive a few trust fund payouts, so I took your advice and put this money on term deposits with my bank, even though the finance companies were paying higher interest rates at the time.
I also saved as much money as possible, taking my lunch to work, rarely buying takeaways and buying groceries when they were on special at the supermarkets.
With all the finance companies that have collapsed, it turned out to be very good advice.
When I retired I was able to buy a house in 2017 in Whangamatā, without needing a mortgage. I thought I paid a lot at the time, but house prices have since risen much higher.
Thanks to reading the advice in your Herald column many years ago, I am in a comfortable position in retirement.
A: That’s wonderful to know.
The finance company issue isn’t as prominent these days as it was. But it’s always true that if a term deposit-like investment offers higher returns than the bank offers, then it must be riskier.
It pays to think from the perspective of the company offering the return. They don’t want to pay any more than necessary to get the use of your money. But they know that savvy investors will realise they are riskier than a bank, so they have to pay a premium or nobody will take up their offer.
If you have money you can afford to lose, you might want to try one of these investments with its higher returns. After all, they usually work out okay.
But for many people it’s not wise to take that risk — including those with house deposit money.
- Mary Holm, ONZM, is a freelance journalist, a seminar presenter and a bestselling author on personal finance. She is a director of Financial Services Complaints Ltd (FSCL) and a former director of the Financial Markets Authority. Her opinions do not reflect the position of any organisation in which she holds office. Mary’s advice is of a general nature, and she is not responsible for any loss that any reader may suffer from following it. Send questions to mary@maryholm.com. Letters should not exceed 200 words. We won’t publish your name. Please provide a (preferably daytime) phone number. Unfortunately, Mary cannot answer all questions, correspond directly with readers, or give financial advice.
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