If you own your own home, you may be able to borrow money if you've paid off all or most of your mortgage. The loan doesn't need to be paid back until your house is sold, usually after you die.
To get a reverse mortgage, you need to live in the home that you own. There may also be an age limit, for example a lender might not give you one if you're under 60.
You can only get a reverse mortgage — sometimes called a home equity release — if you have a large amount of equity in your home. Equity is the difference between what your home is worth and how much you owe on it, if anything.
With a reverse mortgage:
- you can free up some money to help pay for day-to-day or unexpected expenses — you can use the money for anything you like
- you can choose to get the payment as a lump sum, regular income or in small amounts — whatever suits you best and is offered by your lender
- you don't have to pay the loan and interest back until your house is sold — often after you die
- if house prices rise, the equity you still have in your home will continue to grow
- under some schemes you can protect part of the value of your house and keep the rest of the equity as an asset, for example, to pass on to family — in this case, you can usually set aside between 10% and 50% of the market value.
Costs of borrowing
Reverse mortgages cost more than normal home loans because:
- the interest rates are usually 1% to 2% higher
- the fees you pay to set it up and administer it are higher
- you pay more interest over the lifetime of the loan because you're not paying off the loan — interest is added, usually every month, to the full amount of the loan.
Depending on how much you borrow, the amount you owe can double within 10 years.
The fees you pay include:
- getting a valuation
- application fees
- legal fees, and
- administration costs.
Conditions on the loan
Reverse mortgages come with conditions — check with your lender what applies to you.
- You must live in the property.
- You must use the loan money to pay off any existing mortgage on your home before you use it for anything else.
- You can't rent your house out.
- You must keep your house in good condition, including paying the rates and keeping it insured.
- If you choose to take out a loan against part of the value of your house, you won't be able to borrow as much.
Your lender may have a case for not honouring the terms of the loan if you don't meet all their conditions.
If you and your partner jointly own your home, make sure both your names are on the loan document. If one of you moves into residential care or dies, the other partner may have to move out too if they're not one of the borrowers.
Your financial situation can be affected by a reverse mortgage.
When you die, the loan plus interest has to be paid back. This means you'll probably have less to leave to your family or other people who'll benefit from your estate.
You may be left with fewer options to pay for emergency costs in the future if you've taken out a reverse mortgage and spent that money.
The equity you still have in your home may fall if house prices fall.
There's no specific legal protection for anyone taking out a reverse mortgage, other than general protection under the Consumer Guarantees Act. Most lenders also comply with the government's Responsible Lending Code, although it's not legally binding.
The Ministry of Social Development and the Commission for Financial Capability strongly recommend getting independent legal and financial advice before you take out a reverse mortgage. People also find it helpful to discuss the decision with family.
Code of Standards for home equity release loans
The Ministry of Social Development has a voluntary Code of Standards for lenders. Before you take out a reverse mortgage, check if the conditions your lender offers comply with the Code of Standards.
What your lender should offer
Your lender should tell you clearly:
- how their scheme works and how much your loan is likely to cost over your lifetime — some lenders offer online calculators so you can try out different options
- what charges and conditions come with the loan
- whether they or financial advisers get any benefit or payment for arranging your reverse mortgage
- what the interest rate is and if it's variable or fixed
- what your responsibilities are, and what theirs are, for example who arranges insurance and pays rates
- how you must maintain your home under the loan agreement
- when and how they'll let you know about what you owe — they should give you regular statements
- whether you can automatically arrange further borrowing if you need to.
Your lender should guarantee that:
- you can live in your home until you die or decide to sell
- the amount you have to pay back will never be more than the market value of your home — sometimes called the 'net realisable sale value'.
Your lender should also have a complaints process. It should be your right to have your complaint reviewed by an independent person or organisation. For example the Banking Ombudsman would look into your complaint if it was with a bank.
Most lenders insist that you get legal and financial advice before you take out a reverse mortgage. If you don't have a lawyer, contact the NZ Law Society to find a lawyer who can give advice about reverse mortgages.
Many people also talk to a financial adviser to find out if a reverse mortgage is the best option for them. There are other ways to generate income if you're retired.
How much you can borrow
How much you can borrow depends on:
- the equity you have in your home — you can usually borrow between 15% and 40% of the market value, depending on the lender's rules
- your age — as you get older, you can borrow a higher percentage of your property's value
- any conditions set by your lender.
Your other financial arrangements
In some cases, getting a reverse mortgage can affect your other financial arrangements.
If you get NZ Superannuation or a Veteran's Pension
Before taking out a reverse mortgage, check with Senior Services at Work and Income to find out if your pension is affected, especially if:
- you included your partner who isn't eligible for NZ Super or a Veteran's Pension
- your partner is a veteran and you're getting or applying for the Veteran's Pension.
Freephone: 0800 552 002 (NZ only during office hours)
If you move into a rest home or residential care
If you have to sell your home to pay for your residential care, then you must pay back your reverse mortgage, including the interest. This means you're likely to meet the government threshold for the Residential Care Subsidy sooner than you would have if you hadn't taken out a reverse mortgage.
When Work and Income assesses your assets to decide if you can get a Residential Care Subsidy, they may ask you what you used the money from your reverse mortgage for. If they believe you didn't spend it for your own personal benefit or welfare, they can count this money as part of your assets. This may affect whether you can get the subsidy or how much you receive.
If you have a reverse mortgage, you may not be able to get a Residential Care Loan.
If your home is in a family trust
You may still be able to get a reverse mortgage, but the lender will need you to confirm that:
- you're living in the home, and
- all the owners or trustees agree to you taking out a reverse mortgage.
If you're getting a benefit
You need to tell Work and Income about your reverse mortgage if you:
- earn interest from investing the money — they count this as income
- get regular payments from your lender, for example 2 or 3 times a year, rather than taking the money as a lump sum
- use the money for day-to-day expenses rather than one-off or major expenses
- get 1 or more of these benefits:
- Accommodation Supplement
- Temporary Additional Support
- Special Benefit.
If you draw your reverse mortgage down as a lump sum, Work and Income don't count it as income.