Reverse Mortgages - The Good, The Bad And The Ugly

With the poor level of retirement saving in this country other than investing in property, it is inevitable that Reverse Mortgages will become a popular means of providing a source of funds for those in retirement.

If we go back into the 1990’s, there was really only one issuer of such products in New Zealand. The Wellington based principals of the company, did not last long, becoming murder victims.

Since that time, a few new issuers have been established, with one company holding the dominant market share. It has subsequently expanded operations into several other countries.

As at 31 December 2006, there were 4,500 loans with a total book value of $227 million. That makes the average loan only around $50,000. The Safe Home Equity Release Plans Association (SHERPA) predicts that the present rate of growth will continue and that by the end of 2007, that the value of outstanding loans will be close to $500 million.

Actuaries, Trowbridge Deloittte conducted a comprehensive survey of the New Zealand Reverse Mortgage market. They found that the market had more than doubled in size in the past year. Borrowers draw around 60% of the allowable facility at the time of settlement. Most loans are on a variable interest rate. The North Island had over 70% of the loans. Couples made up more than half of all the borrowers and the greatest numbers of loans were to borrowers in the 70 to 79 age bracket.

To us, the survey only confirmed what would be expected. The answers are easily explained when you have an understanding of how the loans work.

The level of borrowing allowed from the market leader increases with age. They need to be sure that they do not get into the situation where they have negative equity. Because of this, they take life expectancy figures into account, hence the interest of an actuarial firm conducting a survey.

The number of loans to those living in the North Island corresponds reasonably well with the numbers of people living in the North Island. With property values often higher in the North Island, the popularity may become disproportionately higher than on a population basis.

The fact that the majority of the loans are to those aged 70 to 79 fits in well with the time that a lot of retired people have used up their savings. This is also the age range of the majority of retired people. For the data to be of any real use, they would be better to break it down, into say five year steps. With the number of retired people increasing reasonably quickly with baby boomers reaching retirement age, the average age of those taking out loans may decrease.

If you or a family member are considering taking out a reverse mortgage, there are significant differences between schemes. The worst scheme that we have come across is one whereby you borrow money from one company with the loan being secured against your property, and invest the money into another to generate retirement income.

As we have said before, reverse mortgages are only one option of funding retirement needs, and should only be considered once other options have been fully explored.