Reverse Mortgages

Mary Holm discusses reverse mortgages, which can be a good way for retired people to make use of the money they have tied up in their homes.Reverse mortgages can be a good way for retired people to make use of the often huge amounts of money they have tied up in their homes. With a reverse mortgage, you make no repayments until you leave your home or die.The negative is that the loan will grow at a compounding rate. So if you have the loan for, say, 20 years, it could grow to 6 times the amount you borrowed or more. After 30 years it might be 15 times what you borrowed. Listen to Mary Holm on reverse mortgages. "People in retirement have often got a house these days worth a million or more and yet they don't have a enough money to have a good time or pay medical bills or to travel or to fix the roof and they are sitting in this house worth a heck of a lot of money," Mary says.She believes they are a good option that many people shy away from."It's a really good idea, not that many New Zealanders use them and I think people are too scared of them and are therefore missing out on having a nicer retirement."You might borrow a lump sum but I don't recommend that because you're borrowing a lot up front and you are going to be paying compound interest on that all the way through for possibly a lot of years so it's best to only borrow as much as you need for something," she says.It might be possible to arrange regular payments to supplement your New Zealand super, she says, or operate it more like a revolving credit mortgage where you borrow as you need funds.Two banks offer the product in New Zealand: both smaller banks, Heartland and SBS, although she suspects more banks will bring this service to the market as the baby boomer generation ages."I predict more and more will do it as the baby boomers are retiring and there's more demand, and at the same time more understanding of these things and people realising how good they can be."Reverse mortgages are more expensive than regular mortgages for good reasons, she says."They do charge higher interest rates, Heartland is 7.82% and SBS is 7.55% - one reason is, they are just plain riskier."For the bank, the risk is that the customer lives a very long time - or the house doesn't appreciate or falls in value.Another reason is it takes a lot more time to set up."They like to make absolutely sure that the customer does understand that they are taking on a debt that will grow, that will compound. Sometimes people's children aren't that happy about it."…Go to this episode on rnz.co.nz for more details