It's a situation many retired Kiwis find themselves in.
Money's tight now there's not much coming in the door so they have to keep a careful eye on spending. Yet they're actually sitting on a gold mine: their home.
For retirees, or those on the verge of leaving the work force and wanting to free up some cash, the obvious choice is to sell their house, buy somewhere cheaper and pocket the difference.
However, not everyone wants – or is able – to do that.
But if they do want access to some of the hard-earned money tied up in their property, there is another option - a reverse equity mortgage, or REM. This is a type of loan that helps them to stay in their home, while using equity built up over the years to enjoy a comfortable lifestyle and reduce money worries.
Only a few banks in New Zealand offer REMs and one, SBS Bank, has launched a new product called SBS Unwind, tailored to Kiwis over 60. Group Chief Executive Shaun Drylie says SBS is offering customers an option allowing them to have the kind of lifestyle they've been looking forward to in their later years.
"We think people should have choices, especially if they want to stay in the home they've worked hard to pay off. It helps them if they need to do renovations, replace their car, or if they may need more money to supplement their standard of living in retirement."
A reverse equity mortgage is so named because it works the opposite way to a standard mortgage and takes advantage of the fact owners have equity in their house.
"In a traditional mortgage, you borrow an amount to buy your home and make regular payments until the principal and the interest charged for that loan is paid off. With a REM, you borrow some of the equity you have in your home without needing to make any payments. You repay the loan when the house is sold or the last person moves out or passes away."
Like any loan, interest applies to a REM. The interest rate is higher than normal mortgage rates (currently 6.2 per cent for an SBS Unwind REM) and interest compounds due to the fact no repayments are being made. So the amount people pay back at the end will be a lot higher than the sum borrowed in the first place. Once the house is sold and the REM repaid, any money left over goes to the customer or their estate.
In the unlikely event that the amount owed to the bank ends up being more than the house value, or what it sells for, the customer or their estate don't have to pay back the shortfall, thanks to a loan repayment guarantee which applies so long as the customer has met the required terms including the property's rates, insurance and maintenance.
One concern people have about reverse equity mortgages is that the repayment requirements will mean their children miss out on an inheritance. To help counter this, SBS Unwind allows for an agreed proportion of the home's value to be protected, helping to ensure no-one misses out. An $80 Equity Protection Fee applies.
"Knowing that gives people peace of mind," says Drylie.
To be eligible for an Unwind REM, you need to own your own home outright or have a standard home loan small enough to be paid off by drawing down the REM. The amount of money that can be accessed is determined by your age and the value of your home.
For example, 60-year-olds can borrow up to a maximum of 15 per cent of the value of their home, while for 70-year-olds it's 25 per cent. At 80, that amount goes up to 35 per cent and 90-year-olds looking to free up some cash can get up to 45 per cent of their home's worth.
Those loans are structured that way because, over the years, the interest can compound up if the customer or customers have long lives. A 60-year-old, for example, who borrows $100,000 in an REM at age 60 (on a house valued at $667,000 with an interest rate remaining at 6.20 per cent), would owe $344,750 at age 80 and $469,745 at age 85. However, if the house appreciates by 2 per cent a year (and after allowing for the borrowing), that 60-year-old would still have equity of $645,000 after 20 years and $623,000 after 25 years.
Drylie says SBS can do all those calculations for customers to give them an idea of the potential impacts of having a REM loan, including the overall loan size and their remaining equity position. He says the big attraction of REMs is that people can use the money however they like, repaying all or part of it at any time.
Drylie says SBS – which has been operating for over 150 years – tries to give its members as much financial freedom as possible. Unwind is a way of letting a particular group of people have greater control over their money.
"It is not about the bank being in charge, it is giving people the chance to create independence for themselves."
"During the application process, we make sure the customer understands the implications of what the loan entails. Once this has been explained, the next step is for the customer to get independent advice from a solicitor, who will further explain the details of the loan," Drylie says.
"Then we also encourage discussion between the customer and their family to ensure they know and understand the loan and what it will mean for each of them. When people pass away, it's a very emotional time for the family and this reduces the likelihood of them being unaware of the loan having to be repaid."
For more information about SBS' reverse equity mortgage – SBS Unwind – and whether it would be suitable for you, along with copies of Standard Contract Terms and Reverse Equity Mortgage Fees and Charges, visit sbsbank.co.nz or call 0800 SBS BANK (727 2265).