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May 2007

Asset Rich but Cash Poor?

Considering “reverse mortgages”?

For many New Zealanders, the family home is their most valuable asset. For some people this can mean they are asset rich but cash poor. It is such people who are being targeted in marketing campaigns for reverse mortgages. These loans can have serious implications for the homeowner.

What are reverse mortgages?

Reverse mortgages usually involve a loan borrowed against the equity in the homeowner’s property. Generally, the loan is repayable on the sale of the property or upon the owner’s death, whichever occurs first. They are particularly attractive to people who have retired and whose home is mortgage free.

How much do reverse mortgages cost?

Reverse mortgage schemes are often advertised on the basis that there are no regular repayments. Whilst this is true, interest and fees are still charged for so long as the loan continues and are added to the balance, which will ultimately have to be repaid. The interest rate will usually be higher than an average bank loan. There may also be fees payable in addition to interest and these can include a valuation fee, commission (e.g. to a broker), early repayment charges and other costs which may be payable in the event that the homeowner decides to sell the home.

Be aware of the downside

Advertising for reverse mortgages is often presented in attractive terms, which suggest that money can be made available to fund things that most people desire, such as holidays, home renovations and travel. While reverse mortgages can make it possible to borrow money against the family home for these purposes, the cost is significant.

Most importantly, the increasing value of your home may not keep pace with the debt owed under the terms of the mortgage. Interest may compound. The amount owing will continue to increase the longer the loan remains unpaid. This will not present a problem so long as you continue to live in your home. However, if you wish to sell your home then the mortgage will be repayable and you may find that the amount that you receive after repaying the loan is insufficient to enable you to buy another home of an equivalent standard.

Seek our advice FIRST

If you are contemplating taking out a reverse mortgage, it is absolutely vital that you obtain independent legal advice from us to fully understand the terms of the loan and the long-term implications for you.