New research delving into home equity release products shows they could be a better alternative for older New Zealanders struggling to make ends meet instead of taking on higher-cost consumer debt.
Te Ara Ahunga Ora Retirement Commission commissioned Motu Research to consider whether home equity release schemes provide value for money and how they might provide a suitable form of retirement income for some people.
The research highlighted that for approximately 25% of older households who have low retirement income and savings, but high levels of equity in their home, equity release products could be more beneficial for them to use instead of high-cost personal loans or credit cards.
In New Zealand home equity release products are not well understood due to the complexity and costs involved. The two main products available here are reverse mortgages and home reversion (selling a stake in your house in exchange for income).
Te Ara Ahunga Ora Retirement Commission Policy Lead, Dr Michelle Reyers says while New Zealand home equity release products appear to be costlier than in larger markets, they can provide an alternative source of income less costly than other forms of consumption-based lending.
“The key to using home equity release products is understanding the costs and benefits and seeking financial advice to see if they are right for you,” she says.
“It’s important to understand that home equity release products have relatively high costs. For reverse mortgages it’s the interest cost. Loan balances on reverse mortgages can grow to a large amount within a short period due to the compounding effect of interest.
“People opting for a reverse mortgage should consider only using the minimum they need to supplement their monthly income rather than larger lump sum withdrawals, as this will slow the rate at which the interest owing builds up over time.”
An alternative for those who want to access an income stream from their home, and at the same time preserve a specific amount of equity in their home, is a home reversion scheme. In this case the main cost is that you are selling a stake in your house for a discounted amount.
However, despite the costs involved, home equity release products used strategically can provide an option for those that have no income beyond New Zealand Superannuation and struggle to pay larger bills but wish to remain in their homes while they can manage independently.
“For the group of retirees relying primarily on New Zealand Super for income who have home equity but no other assets (such as KiwiSaver) to draw down, it is something to consider,” says Dr Reyers.
She recommends:
Thinking about retirement in stages – could you continue in paid work beyond age 65? Do you have access to other assets, such as KiwiSaver that you can draw down to help fund your expenses?
Once these assets are depleted do you want to access the equity in your home with a home equity release product to supplement your retirement income while you continue to live independently at home? At the same time consider whether releasing the equity in your home might impact at a later stage if you want to move into a retirement village or need care.
It is important to consider how home equity release products can affect people’s financial position in the future. Balancing whether you can afford to use some equity now but maintain the required level of equity in your home for another stage of retirement should your health or life circumstances change may require professional advice. One final consideration is if people want to preserve their home equity for future generations through bequests, home equity release products will reduce the amount that they will be able to provide.
Notes:
Reverse mortgages are more suited to people who do not need to preserve the equity in their home for future uses, including bequests. The no negative equity guarantee ensures that the homeowner, or their estate, will not be required to meet any shortfall that the lender incurs if the loan value exceeds the eventual sale price of the house
The key cost of a reverse mortgage is the interest cost which is higher than the cost of a normal mortgage loan due to the added risks of this product and a less competitive market in New Zealand.
Home reversion avoids the compounding of interest and provides certainty to the homeowner that they will retain a specific percentage of equity in their home, so it might be more suitable in a high interest rate environment or for people who have a specific bequest motive.
However, the cost involved is that homeowners will be selling 35% of their house at a discount as they only receive income equivalent to 25% of the initial valuation (taking into account annual fees reduces this to 22.7%).
