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Legal Articles


The Cash In Your House - Reverse Equity Mortgages

Many of us spend most of our lives paying off a house mortgage to provide the security of freehold accommodation in our old age. We can then find we are asset rich but cash poor. The realisation that the equity in our homes is not much use to us, unless we can access it, has led to the growth of the home equity release mortgage market.


While reverse mortgages, as they are often called, have been around for years and are a huge part of the mortgage market overseas, they have only started to take off in New Zealand in the last few years. Basically they are a way to have your cake and eat it while you are alive, although upon your death, the cake may be reduced to only a few crumbs.


How they work is that you enter into a mortgage of your house. The amount you can borrow depends upon your age and life expectancy (calculated from actuarial tables) and the value (equity) in your home. The loan is paid to you, either in one lump sum or by several amounts over a period of years, until you reach a pre-determined limit. If your house increases in value, the limit may be able to be reassessed. There are some lenders who will structure a reverse mortgage so it is paid out as a regular annuity, although these loans are not so common now. Whichever type of payment you elect to receive, nothing has to be paid back during your lifetime. You have the benefit of remaining in your home and receiving back some of your equity. The amount loaned and accrued interest is paid back to the lender upon your death or prior disposal of your property.


It all sounds deceptively simple but there are many things to think about before you sign on the dotted line and start drawing the equity out of your house. Important considerations include:


-Reverse mortgage interest rates are higher than for most other mortgage
lending. This is due to uncertainties in the housing and money markets and
the lender having to wait for years to get any profit. As a result, with high
interest added on, the debt increases rapidly.


- If say in your sixties you have borrowed significantly, you may find in your late seventies or early eighties, when you have a sudden need for funds, that your house is by then heavily mortgaged with little equity left in it. Your options may be very few. It could, for example, be impossible to sell your house and obtain sufficient equity from the sale to purchase another property, or raise additional finance on your home for some urgent purpose.


-There is also the issue of whether you wish to leave property to the next generation of the family. If the house is your major asset and you enter into a reverse mortgage and live a long time afterwards, then by the time of your death there may be little left for your family to inherit.


The growing importance and possible pitfalls of the reverse mortgage market have been recognised by Government which set aside money in the 2005 Budget for the Office for Senior Citizens to develop a Code of Practice for this type of lending. While the code is being developed it is strongly recommended that you seek independent legal advice and also talk with your family before entering into a reverse equity type mortgage.


You need to carefully read through the lengthy documentation and consider both the short and long term effects on your property and overall financial position. There are a number of lenders in the market place. The reputable ones will encourage you to get independent legal advice (one of the larger ones insists upon it) and will provide you with plenty of information. You should be able to calculate how quickly your mortgage debt increases and home equity diminishes, as well as being aware of all the costs involved. There are usually quite significant upfront costs involved which may include an arrangement fee, valuation costs and legal costs. These will normally be deducted from the amount you borrow.


There is no doubt that reverse mortgages have enabled many cash strapped senior citizens to enjoy a higher standard of living. However, some have run into problems when life has taken an unexpected twist and they find their reduced home equity has restricted their choices late in life when they are most vulnerable.


In summary, get good legal and financial advice and consider all the other options for raising the money you need, before signing up and starting to draw the cash out of your home. Reverse mortgages are great for some people but are not for everyone.



Disclaimer: The information contained in this article is of a general and summarised nature only. It should not be used as a substitute for personal legal advice.


© Terry Carson 2008


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