What is a reverse mortgage, and when should you think of applying for one?
A high proportion of people aged 65 and over depend largely and sometimes entirely on NZ Superannuation for their income. As a result, money can be tight, especially when unexpected expenses come up.
This is where a reverse mortgage comes in. It’s like a normal home loan, but designed for the needs of seniors. It allows people aged 60 and over to release home equity in order to borrow funds using their home as security. This means you can free up part of the value of your house without having to sell it.
How does a reverse mortgage work?
You can take the money as a lump sum, draw on it as needed, or receive regular payments. The last two options can help keep interest down if you don’t need the whole amount right away.
You can use the money for anything you want. Whether it be for a holiday, a new car, health care or just an income top-up. Many people borrow because they want to stay in their existing home, with family and friends nearby, but they just need a little more money to make life comfortable.
Repaying the loan
Unlike a standard mortgage, you won’t need to make regular repayments. Instead, interest is calculated based on the balance outstanding, and added monthly to your loan. Voluntary repayments can be made at any time, which reduces the balance and interest charged.
The total loan amount, including accumulated interest, is repayable when you move permanently from your home; which could occur when you sell your property, move into long-term care or pass away.
What makes you eligible for a Reverse Mortgage
To be eligible for a Reverse Mortgage, you must:
- Be at least 60 years of age before applying for a reverse mortgage.
- Your home needs to be mortgage-free, although you may be able to borrow if you have a small mortgage left and use the loan to pay it off.
- You can only borrow a percentage of your home’s value.
Reverse mortgages generally come with a lifetime occupancy guarantee, which gives borrowers the right to live in their home for as long as they choose. They also usually offer a “no negative equity” guarantee that ensures that you won’t have to repay more than what your house sells for. So you won’t need to worry about leaving your children with debt if the house sells for less than the amount of the outstanding loan.
Should you apply for a Reverse Mortgage?
As with a normal mortgage, it’s important to do your research first. Reverse mortgages are not ideal for everyone or every situation. Carefully consider what you need the money for - and how long you intend to stay in that particular house. After you evaluate this, it may turn out that you’d be better off looking at other options.
Getting independent legal advice is extremely helpful in understanding what a reverse mortgage may mean for you and whether it’s the best option for your particular situation.
If you’re interested in applying or learning more about a reverse mortgage, Heartland Bank and SBS bank are just a few lenders you can choose from.
For more helpful home buying tips head to the Summit Homes blog!
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