The Ex-Files: Jeremy Sutton - Should I get out a reverse mortgage to help my grandson?

You may be able to take out a reverse mortgage to help your grandson purchase a home. Photo / 123RF

Opinion

OPINION:

Q: I'm in my late 60s and my grandson is looking to buy his first home. He has been saving and almost has enough for a deposit but I would like to help him out as he is my only grandchild. I have heard of people taking out reverse mortgages to help their family buy property. My new wife is not keen on the idea as she does not get along with my grandson. However, I purchased the property before I met her and it is only my name on the title. How do reverse mortgages work and is it a good idea to use one to help my grandson?

A: As we all know, it is no easy task to break into the property market at the moment. Many first-home buyers are needing support from family to get on to the property ladder. It is great that you want to help your grandson in this way, but you should take some steps to ensure you are also well protected.

What is a reverse mortgage?

A reverse mortgage is a loan that allows you to access some of the equity in your home. For many people, their home is their largest asset. A reverse mortgage allows you to access some of the value in your home which can be useful if you do not have significant liquid assets.

Unlike a regular mortgage, you do not need to make regular payments. Interest is calculated on the balance and added monthly to the loan. This means that generally the balance on the loan only increases because you are not making regular payments. The total loan amount, including any interest or fees accumulated, is repayable when you permanently move from the home. This may occur if you sell the property, move into a retirement home or pass away.

Who is eligible for a reverse mortgage?

Reverse mortgages are typically only available to those aged 60 years or older. You must own your home outright or have a small mortgage that can be paid off using the reverse mortgage. The amount that you can borrow will depend on the value of your home and your age.

Is a reverse mortgage appropriate?

A reverse mortgage would allow you to access the equity you have built up in your home to help out your grandson. They are often flexible so you can elect to be paid in monthly instalments, a lump sum or a combination of the two. You do not need to make repayments while you still live in the home.

Reverse mortgages can be a very appealing option but it is important to consider also the potential risks and drawbacks.

Planning for the future

Many people get out a reverse mortgage with the intention that they will live in the home until they pass away, at which point the loan will be repaid. However, as you are in your sixties, you are still quite young. If your plans change and you choose to move homes or into a retirement village, you will need to repay the loan and any interest accrued. You need to be sure that you will still have enough left over for a change of circumstances.

As you are not making regular repayments on the principal amount, the compounding interest can grow the loan at a faster rate than you may expect. This will leave you with less equity to purchase your next home which can be a problem in an ever-increasing property market. Depending on the loan you agree to, the interest rate is also likely to change over the life of the loan and if the interest rate increases, that will make the loan more expensive.

It is also important to remember that even if the property market is strong at the moment, there is no guarantee that it will always be that way. A sudden crash in the market could reduce your equity in the home. Some banks give a guarantee that you cannot have negative equity, giving you some protection (meaning the amount you repay never exceeds the value of the home), but not all of them do - it pays to double-check their terms and conditions carefully.

Other options

A reverse mortgage is not the only way to access the equity in your home. You could also consider downsizing to a smaller home. If your new home is cheaper than your current home, you could use the difference to help your grandson. You also might look at cashing in other assets rather than using a reverse mortgage – Shares, KiwiSaver (when you turn 65) or other investments you might have.

Gift or loan?

Another important consideration is whether the money you intend to provide your grandson is a gift or a loan. You may decide to gift it as an early inheritance or intend it as a loan to be repaid when you pass away. Either way, you should have signed legal documents in place to record your intention. By having the correct documentation in place, you can minimise the risk of a later dispute.

Both you and your grandson should seek independent legal advice and arrange a written agreement to be drawn up that reflects your arrangement. Your lawyer can then create a loan agreement or a deed of gift. This agreement or deed should be witnessed and certified by lawyers so their authenticity is not challenged at a later date.

Other considerations

Relationship debt

Although you own the house in your sole name, your wife would have an interest in the property if you separate or pass away as the family home is considered relationship property.

Unless you have a contracting out agreement that states otherwise, your wife is entitled to 50 per cent of the value of the property at the end of your relationship. This means that any reverse mortgage over the property would be considered a relationship debt and would reduce the relationship property pool.

If you get a reverse mortgage without your wife's knowledge and later separate, she may be able to make a claim for a greater share of the property pool.

Impact on your estate

If you intend to leave property to your wife or children after you pass away, you should also consider the impact of using a reverse mortgage to help one grandson. Essentially, the reverse mortgage will reduce the amount available to all other beneficiaries of your estate.

You should ensure that all people who may expect to receive an inheritance from your estate are informed about your plans so that there are no unexpected surprises when you pass away. These types of transactions can cause a rift in the family if not kept informed. It might also be a good idea to look at updating your will at the same time.

Summary

You may be able to take out a reverse mortgage to help your grandson purchase a home. You should obtain independent legal and financial advice before you make your decision as there are risks involved. As you are only in your sixties, the loan could grow to be substantial over time and you will need to repay it if you want to move. You should also speak with a lawyer who can help draw up the necessary documents to record whether the money is a gift or a loan.

- Jeremy Sutton is a senior family lawyer, specialising in divorce cases where there are significant assets, including family trusts and complex business structures.