While reverse mortgages have traditionally been seen as a little unconventional, it’s not surprising that New Zealand’s major lenders of reverse mortgages have seen a sharp rise in new approvals. Rising house prices and a higher cost of living have forced some homeowners approaching retirement to re-evaluate their financial position, and consider a reverse mortgage as a means to a financially comfortable retirement. To help you decide, here are the pros and cons of a reverse mortgage.
What is a reverse mortgage?
Reverse mortgages allow homeowners to borrow against the equity in their existing home, by cashing in some or all of the value of the property to fund retirement, without having to make mortgage repayments until the property is sold. Lenders charge a variable interest rate that is usually at the top of their mortgage range, and recover the cost of the mortgage when the property is sold.
The requirements for a reverse mortgage generally include:
- You must be 60 or older
- The property must be your main residence or secondary property
- The property must be in good condition and meet a minimum value
- And it must be mortgage-free
What are the pros?
While lending conditions may differ from lender to lender, most reverse mortgages offer the following benefits:
- You can spend the money how you like. You could pay down your debt, fund home improvements, travel, pay for a medical treatment, or even use it for general living expenses.
- You don’t have to take up the full loan immediately. Instead you can opt to draw-down money when you need it, with no interest charged until you do.
- Reverse mortgage lenders have a no-negative-equity guarantee, meaning mortgagees can never reach the point where they owe more than the house is worth.
- You can repay the loan, in full or in part, at any time.
What are the cons?
Just as there are benefits to this type of lending, so too are their downfalls. It’s important borrowers assess how these could impact their financial position before deciding on a reverse mortgage.
The cons include:
- Borrowers accrue compound interest on their cost of living and at a higher rate than fixed rates, meaning they are leaving less value for their children as an inheritance.
- Interest rates are variable and can change at any time.
- There are other costs to consider, including start-up costs and fees, as well as continuing costs such as mortgage insurance, house insurance, and rates.
- Borrowers may not rent the house while away travelling, and if they sell it or move into care, they are required to sell the property and pay back the loan.
A secure and comfortable retirement
While reverse mortgages may be something of a gamble – in that the cost of interest will accumulate over the life of the loan – the biggest advantage for borrowers is that they offer the opportunity of a secure and comfortable retirement.
If you think a reverse mortgage is something you’d like to know more about, get in touch with a Mortgage Express branded mortgage adviser who can refer you to a lender that specializes in this type of mortgage lending and help you make an informed decision about your financial future.