Recent media coverage views reverse mortgages as a viable but risky option for “asset-rich but cash-poor” retirees.  They are not for everyone but have their place.

A reverse mortgage allows homeowners to borrow against the equity in their home without making regular repayments.  The loan is repaid when the property is sold, usually after the homeowner moves into care, relocates or passes away.

The amount available to borrow under a reverse mortgage depends on a range of factors, including the value of your home, your age and the lender’s criteria.

Benefits

 For some, a reverse mortgage can provide financial flexibility and improve personal cash flow during retirement.

There is no restriction on what funds can be used for.  Including supplementing superannuation, paying debts, covering medical expenses, travelling or making significant purchases ie a vehicle.

Drawbacks

Reverse mortgages are significant financial commitments.  Interest compounds over time, meaning the amount owing can increase substantially and reduce the equity remaining in the property.  The loan may consume most or all of the home’s value over time.

Other considerations include:

1. Higher interest rates than standard home loans;
2. Ongoing fees and lender conditions;
3. Potential impacts on future retirement or aged care plans.

Alternative Options

Before proceeding with a reverse mortgage, it is always advisable to consider other options including:

1. Downsizing to a smaller cheaper property. That means you walk away with cash and no debt;
2. Check kiwisaver balances and draw first;
3. Entering into a family lending or ownership arrangement;
4. Renting out part of the home;
5. Subdividing the property;
6. Accessing council rates relief.

Independent legal and financial advice should always be obtained.  If you require assistance understanding reverse mortgages, speak with one of our friendly team members.