A Reverse Mortgage is just like a normal mortgage but doesn’t require payments as interest is added to the loan monthly based on the balance. The loan usually gets repaid fully when you come to sell your house. 

It’s important to know that the loan balance will increase over time if you don’t make payments as accrued interest is added to the loan (a bit like compounding saving). 

It’s targeted at the 60 plus age group who have equity but not necessarily cash available. It often allows retired people the chance to live in their home longer and pull money out for day-to-day expenses and bigger financial needs. 

You can use your family home or potentially a rental property or holiday home as security. 

The loan does get bigger over time, and usually on a floating rate, meaning you can make voluntary payments if you wish, but also the interest charged can change up or down throughout the life of the loan. 

The more equity and the older you are, the more money you can potentially borrow (terms and conditions apply). 

Why consider a Reverse Mortgage?  Given a lot of over 60’s are potentially asset rich and cash poor, a Reverse Mortgage can provide money for renovations, travel, medical care, debt consolidation, vehicle purchase, family gifts and potentially buying a home if downsizing. 

The Reverse Mortgage could sometimes refinance an existing mortgage allowing the removal of mortgage payments from your monthly expense budget. 

There is often a guarantee that the borrower will never owe more than what the house is worth, preventing you from going into negative equity. 

The Reverse Mortgage lender will often obtain a valuation report or go off an online value when you sign up. They also provide you projections of what the loan may grow to over time. In theory if the value of your home grows over time (capital gain), then the rate of diminishing equity should be less (or slow down) if your house didn’t increase in value. 

Sometimes family members will help parents by paying the loan interest and seeking legal advice is usually a prerequisite. 

Reverse Mortgages are not for everyone and over time can incur a lot of interest. But they are a good option for older borrowers to release equity in their home and have cash to spend when they want to stay in their family home. Many retirees struggle to live a comfortable life but then realise they can release funds tied up in their home. 

There can also be options for helping borrowers with bridging finance to get into a retirement village unit. 

If you would like some general impartial advice on Reverse Mortgages, please email craig@craigpopefinancial.co.nz