What retirees need to know before borrowing against their home
For many retired New Zealanders, the family home is their biggest asset. You may own your house outright, yet still find that NZ Super and savings do not always stretch as far as you hoped. When unexpected costs arise such as home repairs, medical expenses, travel, or helping family, it can be tempting to look at ways to unlock the value in your home without selling it.
Here are the things to consider when looking into a reversed mortgage, based on information from the Money Hub Reverse Mortgages – Definitive New Zealand Guide
For eligible homeowners aged 60 plus, a reverse mortgage, also known as a home equity release loan can provide cash without requiring regular repayments, but it also comes with risks and long-term costs that need careful thought.
This guide explains how reverse mortgages work, their advantages and disadvantages and what alternatives you may want to consider before making a decision.
What is a reverse mortgage?
A reverse mortgage allows you to borrow money using your home as security, without making repayments while you continue living there. Instead of paying the loan back each month, the interest is added to the balance and the total amount is repaid when you sell your home, move permanently into care, or pass away.
Reverse mortgages are usually only available to people aged 60 or older who own their home outright, or who have very little left on their existing mortgage. The amount you can borrow depends on your age and the value of your home.
In most cases, lenders will allow you to borrow between 15 and 40 percent of your home’s value, with older borrowers able to access a higher percentage. For example, a 75-year-old homeowner may be able to borrow around 30 percent of the home’s value, while someone aged 85 could borrow closer to 40 percent.
The money can be taken as a lump sum, smaller withdrawals over time, or regular payments. Many retirees use reverse mortgages to pay for renovations, buy a car, travel, or consolidate debts.
Why reverse mortgages can look attractive
One reason reverse mortgages appeal to retirees is that they offer access to cash without forcing you to sell your home. You can stay where you are, continue receiving NZ Super, and use the money however you wish.
Another feature is that repayments are usually not required during your lifetime, as long as you keep living in the home and meet the loan conditions. Some lenders also offer a no negative equity guarantee, meaning you or your estate will never owe more than the home is worth when it is sold.
If house prices rise over time, the increase in value can help offset some of the interest charged on the loan, although this is never guaranteed.
For people who want to remain in their home but need extra funds, a reverse mortgage can seem like a simple solution. However, it is important to understand the long-term costs before going ahead.
The biggest risk: compounding interest
Reverse mortgages usually have higher interest rates than standard home loans, often around 9 to 10 percent per year and the interest compounds. This means you pay interest on the interest that has already been added to the loan.
Because no repayments are made, the balance can grow very quickly over time.
For example, borrowing $100,000 at age 65 could grow to more than $400,000 by age 80 and much more if the loan continues for longer. If the loan runs for 20 or 25 years, the amount owed can become very large, significantly reducing the value of your home when it is eventually sold.
This is why financial advisers often suggest only borrowing what you really need, rather than taking the maximum available.
How a reverse mortgage can affect your future choices
A reverse mortgage does not usually cause problems if you stay in your home for the rest of your life, but circumstances can change.
If you later decide to move to a retirement village, downsize, or enter residential care, the loan must usually be repaid when the house is sold. Because the debt may have grown over many years, you could end up with less money than expected.
In some cases, the remaining equity may not be enough to cover the cost of a retirement unit or long-term care. This is one of the biggest risks to consider before taking out a reverse mortgage.
It will also impact the inheritance you leave behind, as the lender has the first claim on the proceeds when the home is sold.
Fees and conditions to be aware of
Reverse mortgages can include several fees, such as valuation fees, arrangement fees, drawdown fees and discharge fees when the loan ends. These are usually added to the loan balance.
There are also conditions you must follow. You will need to keep the house insured, pay council rates, and maintain the property. In most cases, you must continue living in the home and cannot rent it out completely.
Interest rates are usually floating, meaning they can increase in the future, which may cause the loan balance to grow even faster.
Before signing any agreement, it is important to check that the contract includes:
Lifetime occupancy rights
No required repayments while you live in the home
A no negative equity guarantee
Both partners named on the loan if you are a couple
Alternatives worth considering
A reverse mortgage is not the only way to access money in retirement. Depending on your situation, other options may be safer or more suitable.
Some retirees choose to downsize to a smaller home and use the extra money to support their lifestyle. Others rent out part of their home, subdivide land, or move to a retirement village where maintenance costs are lower.
There are also equity-release products that provide income in exchange for a share of your home’s future value rather than a loan, although these also need careful consideration and independent advice.
Take time and get advice
Reverse mortgages are widely used in New Zealand and can work well for some people, but they are complex financial products. Because the costs build up over many years, the decision you make today can affect your options later in life.
Before going ahead, it is wise to talk to a financial adviser, a lawyer and your family. Make sure you understand the interest costs, the fees and how the loan could affect your future housing choices.
Your home is often your greatest security in retirement. If you are thinking about borrowing against it, take the time to explore all your options so you can make the choice that best supports your independence, comfort and peace of mind.
