Keep your home and eat it, too

By PHILIP MACALISTER

For years, many older people have been sitting on a mountain of cash they can't get their hands on - until now.

One striking feature of the New Zealand savings environment is that a large majority of people own their own homes and have much of their savings tied up in that one place.

They are asset-rich but cash-poor.

About 500,000 New Zealanders are aged over 65, and 80 per cent of them own their own homes. Their median income, for a couple, is $22,000.

The trouble with this picture is that those people have had few ways of getting their hands on some of that housing capital. They can trade down to a less expensive home, but the anecdotal evidence suggests that few people do this.

A new key to unlocking some of this money is reverse annuity mortgage (RAM) and home equity release (HER) schemes. While they work differently, the two are often lumped together as both give people access to their housing capital.

Save and Invest, a division of listed financial services company Dorchester, has offered both RAMs and HER schemes since the early 1990s, but its products have failed to fire the imagination of older people.

But things have changed in recent weeks with the coincidental arrival of two new players - Sentinel and Home Equity Securities.

Sentinel was set up by the founders of Sovereign, Chris and Richard Coon, Ian Hendry and Paul Bravo, and the company is chaired by superannuation consultant Boyd Klap.

The other firm, Home Equity Securities, is part of Christchurch firm Avon Investments. Avon is chaired by Barney Sundsrum, who is also the chairman of Lyttelton Port Company.

Both firms have teamed up with serious partners to push their products in New Zealand. Sentinel's partner is the Commonwealth Bank of Australia (which owns ASB Bank and Sovereign).

Avon has formed a joint venture with Financial Freedom Senior Funding Corporation of the US. Financial Freedom, owned by Lehman Brothers Bank, is the largest originator and servicer of reverse mortgages in the United States.

While SAI is the only firm offering RAMs, it is worth understanding the difference between the two types of schemes. With a RAM you can use your home to pay for an annuity that provides a regular income for the rest of your life.

HER schemes, on the other hand, allow people to convert some of the capital in their houses to a lump sum.

Essentially, a mortgage is taken over the property for the amount of capital required. This loan and accrued interest are repaid through the sale of the house when the borrower dies or goes into permanent care.

Another key difference is that the HER lump sum is tax-free while the RAM, technically an insurance product, is taxable.

Save and Invest general manager Stephen Jonas says there is a place for both products. RAMs are good for people who want regular, long-term assured income - sort of like getting a wage without working. HERs provide a short-term hit of money.

With the two new HERs in the market, there are no conditions on what the money is used for. It could be for home repairs, long-term healthcare, to pay off existing debt, for your grandchildren's education, or to pay for an overseas trip or a new car.

Why the sudden interest in home equity release schemes?

In reality, there has always been interest in this sort of product. The trouble is, until now, no one has worked out how to put together a structure that is tax-effective and affordable.

The 1997 Periodic Review Group - the Government's six-yearly health check of the country's superannuation policies - called for more research into HER schemes.

Consequently, the Retirement Commission engaged Victoria University associate professor Judith Davey to produce a paper on home equity release and home equity conversion schemes.

She concluded that the market for HER schemes in New Zealand and similar countries was potentially huge. The reasons included the ageing population, the fact that many older people were housing-rich and income-poor, and that Government policies aimed to encourage self-reliance.

When Davey wrote her report, markets for HERs in Britain and Australia were also underdeveloped. In the past few years they have become a rapid growth area in the personal finance market in Britain.

Figures from the Council of Mortgage Lenders show the number of people taking out these schemes grew 69 per cent last year, taking the total outstanding "lifetime" mortgage lending to almost £3 billion.

More than 25,000 lifetime mortgages, worth in excess of £1 billion, were advanced last year, compared with 16,300 with a value of £655 million in 2002.

The average loan taken out was £44,000 and the typical age of borrowers was 60.

Australia remains underdeveloped, but St George Bank and Commonwealth Bank of Australia launched products last year.

Sentinel and Home Equity Securities point to similar reasons for introducing home equity release schemes in New Zealand now. The first is that low interest rates are positive. The higher the interest rate, the greater the proportion of money that goes in interest costs.

Also, the booming housing market means many people have much more in assets than they did five years earlier.

The third point is attitudes to inheritance.

"Attitudes about inheritance are central to the debate on whether housing wealth can or should be used to supplement income in old age," Davey said.

Traditionally, older people hate debt and have worked hard to be debt-free. Taking on debt at the end of their lives is anathema to them.

Second, there has been a view that they should leave a legacy to their children and grandchildren.

Sentinel marketing manager Paul Bravo contends that attitudes to inheritance have changed significantly.

Now there is the so-called "SKI" generation (spend the kids' inheritance), but a desire to help them out when possible. For instance, someone may want to release some of the equity in his or her home to help a grandchild through university.

Stephen Jonas points out that the changes to inheritance are slow-moving and tend to shift with the generations.

"[HERs] are not an evil thing," he says. "If you want to improve your lifestyle, it's a real opportunity."

Jonas says the arrival of two new firms is good as it helps to "normalise" the products and strengthen the education process.

"We're not out on our own any more."

* Philip Macalister is the editor of online personal finance magazine Good Returns