Cashing in on lifetime assets

Joan Foster, 78, adores her Wellington home and has lived in it for the past 40 years. After her husband died a few years ago, she began to have one maintenance problem after another. Every time it rained, there were leaks all over the house, and before long, the wallpaper was ruined.

Her son was in England, so she couldn't ask him for help, and she knew the decline of his family home would distress him. As a widow on a pension, she didn't have the money to bring in tradespeople to help the situation, and in her darkest hours she thought about moving to a townhouse.

After seeing an article about home equity release, she rang a lawyer friend, who looked into the scheme. "Initially, I was nervous, but when my lawyer said it was either make use of some equity in the house or move, I knew it was the best choice for me," she says.

Foster also took her Sentinel policy to an independent adviser, the Public Trust, to make sure it had no fish hooks.

After the first valuation of her home in 20 years, Foster was delighted to find that her house was worth over $1 million; the land valuation alone was $800,000. She was eligible to borrow 33 per cent of the value of the property. Choosing to take an initial $70,000, Foster used the money for re-roofing and fixing structural problems, as well as for a new kitchen and bathroom.

Foster has had two additional top-ups of lump sums to redo the entire house, and she has a new car with extra safety features, so she is more confident about driving.

Is it money well spent? She believes that as the majority of her loan has been reinvested in the house, it is worth more than ever. And she has only made a small dent in her equity. "I'm living as I want to live," she says.

For pensioners like Foster, who have no source of income other than their homes and are mortgage free, a home equity release scheme is a viable option. But it may not be her only option, and Retirement Commissioner Diana Crossan would like to see other avenues exhausted before people sign up to pay high compound interest rates of 10.75 per cent plus. Asking for family help is an obvious idea, although many elderly people are too independent to do this. Foster could have asked her son, for instance, to invest money in the family home, although this never occurred to her. "I have always looked after myself in the past, and I didn't want that to change."

A report out last week by the NZ Institute for Research on Ageing, done on behalf of the Retirement Commission, was generally positive about equity release schemes. Following that, Crossan does see equity release as a realistic option - but only for some.

She is concerned that 64 per cent of those surveyed had not considered alternative means of addressing financial woes in retirement, and only 17 per cent had shopped around for products. "Another slightly worrying thing is that family can put pressure on parents and encourage them to take money out of their asset to give to the family," she says.

Crossan refers people to the commission's financial planning website to help them explore their options.

The Office for Senior Citizens, which was also involved in the report, is developing a code of practice for home equity release schemes, and a discussion paper is imminent from Minister Ruth Dyson. The code will bolster the financial tool in the eyes of the finance industry. It will ensure, for instance, that the elderly will never have to leave their homes until they choose to. Overseas, it is common practice to have regulatory controls.

If Joan Foster's situation sounds familiar, you will understand why the New Zealand providers of home equity release in New Zealand are so excited about the potential for growth. Sentinel sales and marketing director Paul Bravo, who also owns a share of the company, says he expects the market to go from the current $150 million to a $1 billion in the next five years.

"Over 80 per cent of people in retirement own their homes, and their property is valued at about $70 billion right now. Over the next 30 or 40 years, that is going to increase to $700 billion. That's an enormous source of wealth sitting there.

"Only 3000 families out of a population of four million have taken it up. We have a long way to go." He says Sentinel currently has about $2 million of policies in the works divided up among 50 families, and business is growing.

Bravo's talk is not madly over-optimistic, considering the way the markets have grown internationally.

In the UK, the industry was worth £127 million (NZ$383 million) in the early 1990s and is now worth £2 billion (NZ$6 billion). In Australia the home equity release market is already in the A$1 billion (NZ$1.2 billion) range, and it grew by almost 170 per cent last year. Around 20 providers operate there, including two of the banks, St George and Commonwealth. And although the New Zealand market is pretty young - SAI Life/Dorchester has been offering a reverse annuity mortgage since the early 1990s - you could argue that this is the most obvious place for it to take off in the world. With New Zealanders' abysmal" reputation for saving, as one financier puts it, a government which believes in self-reliance, and the fact that our assets are tied up with our homes, the timing is right, say the providers.

At the moment there are three main companies - SAI, Sentinel and Life-Time Financial - who are marketing the schemes through financial advisers, accountants and lawyers. Sentinel, set up by former Sovereign directors Chris and Richard Coon, currently has about 80 per cent of the market. The main three will no doubt be joined by others in the next few years, with banks and financial companies chipping in to make the offering more competitive.

The home equity release message is being spread across all businesses. Bravo says he has talked to two private hospitals about the schemes. "From their perspective, they are giving quality medical advice, and the best advice is to get that operation done now."

Members of the Retirement Village Association have also talked to Sentinel about certain products. Bravo says the company has also had discussions with two banks, and "there is every likelihood we would distribute for them".

Meanwhile, competition between the existing players looks likely to hot up in the next month, which will be good news for customers.

SAI Life/Dorchester is to launch its latest reverse annuity mortgage (RAM) product, the RAM Ultimate, on August 23. The biggest news about this new product is that it will be offering a far lower interest rate than those currently on the market, which range from 10.75 per cent to 10.95 per cent.

"Rates will have to come down in the next couple of years," says Mark Darrow, CEO advisory businesses for parent company Dorchester Pacific.

With the RAM Ultimate, people will be able to fix the rate, an industry first, says Darrow. They will also be able to fix the term. As it stands, the first few thousand New Zealanders who have taken out these policies are using them for legitimate reasons. But there is a real fear that the undisciplined could get themselves into trouble.

Overseas there are cases of people getting into negative equity by overspending. The Institute for Research on Ageing report shows most of those surveyed have used the money for much needed things such as home maintenance or improvement (50 per cent), or a car; 20 per cent used the money for travel or debts.

Sentinel's Bravo says the babyboomers will propel the market forward. "When the babyboomers start, it's all going to change. Most [clients today] are from the previous generation. They are driven by needs, not wants. When the boomers start to come through, they will be saying, 'We've always had a holiday in Hawaii every three years', or 'We don't want to drink the house wine at the club when they've got that nice Oyster Bay stuff'. It's going to be more lifestyle related - the holiday of a lifetime, going to the Valley of the Kings."

Talk of home equity release schemes makes wealth coaches like Joan Baker shake their heads with displeasure. She says she is working hard to ensure her clients never need them. "Most of the products are expensive, you pay a lot for this, that's the problem."

She sees people's inability to support themselves properly in retirement as part of a bigger problem. "There is no overall architecture of money. You can't eat a house. People look at work and income as something they will have forever. The money does stop unless you have a lot of investments. Unless you have capital or property you can sell, you are effectively without an income."