A Reverse Mortgage - 'Is it for me?'
If you are concerned that the slowing property market means that selling your home and moving to a retirement village or another newer property is not an option, you may consider a reverse mortgage to pay for a new kitchen, bathroom and heat pump.
Or, if your children and grandchildren live overseas, you may be considering a reverse mortgage to pay for a trip to see them.
If your current car is no longer as easy to park and is costing you a fortune in fuel, you may be thinking about a reverse mortgage to fund a new vehicle.
So, how do reverse mortgages work? When are they repaid? How much can you borrow? How much do they cost? Are there other considerations?
How do they work?
You contact the provider, who will arrange for a valuation of your home.
- The loan application is completed.
- You arrange to see your Lawlink solicitor to get independent legal advice.
- A mortgage is registered on your title.
- The funds less the fees (approx $1,540 plus your lawyer's fees) are paid to your account.
Who qualifies?
With most providers, only people over 60 who own their own home can apply. The amount you are able to borrow depends on the value of your home and your age. If your home is owned by a family trust, all the trustees would need to sign the application form and the loan documents.
How much can you borrow?
The provider may have a minimum of $10,000. Top ups of $5,000 or more are available.
If a couple are borrowing, the age of the youngest person will apply.
- At age 60 you can borrow up to 15% of the current value of your home.
- At 70 this increases to 25%.
- At 80 it goes up to 35%.
- At 90 and over it goes to 45%.
When is the loan repaid?
The loan is repaid when the house is sold or when you die.
The key difference between a normal mortgage and a reverse mortgage is that the interest compounds.
Other considerations
You can set up the loan so that a set portion of your home's current value can be ‘protected' for your estate. Most providers will guarantee that your estate will not have to pay more than the sale proceeds of the house. For this to happen you must have complied with all of their requirements.
Your estate will be reduced. For this reason we recommend that the loan be discussed with your family, they may be in a position to lend you the funds at a better interest rate.
Depending on the amount borrowed, the equity in your home may reduce to the point where you will not be able to purchase a retirement unit if that is your long term plan.
Borrowers have ongoing obligations to the loan provider to maintain insurance and maintenance and allow regular valuations to be carried out by their staff.
The mortgage contract will include provisions requiring you to maintain the property.
If you do not, the provider, after giving you notice outlining your failure and requiring you to remedy it, can exercise its right to enter the property and take possession if they are concerned that it is not being maintained and their interest in the property is at risk.
As the amount you borrow is based on your age and the value of the property, the ‘softening' of the housing market will mean you may not be able to apply for top up later on. The providers are currently advising people to only borrow what they need.
For example
In January 2008 our clients aged 65 were approved to borrow $26,390 including the lender's costs of $1,390. We prepared a table (see below attachment) to show them the effect of the compounding interest at 11.55% over five years. During that time they ‘pay' $19,191.21 in interest, i.e. the value of the mortgage is now $45,581.21.
The clients decided not to proceed with the loan. They felt it was an expensive option.
In June 2008 the interest rate had moved to 12.25% pa and the provider's fees had risen to $1,540.
Summary
- Reverse mortgages use the equity in your home.
- Interest compounds.
- The loan is repaid when the house is sold or when you die.
- Independent legal advice is essential; your Lawlink lawyer will be able to advise you.
© Harkness Henry & Co
Email jane.quinn@harkness.co.nz
Website http://www.harkness.co.nz/
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