For retirees relying solely on NZ Superannuation, managing day-to-day expenses can be a real challenge. Unexpected costs often stretch budgets to the limit. A reverse mortgage could provide a financial lifeline to those nearing or entering retirement, unlocking equity in the home and freeing up extra cash when it’s needed most. However, before considering a reverse mortgage, it’s essential to understand how reverse mortgages work, along with their benefits and potential drawbacks.
What is a Reverse Mortgage?
A reverse mortgage is a financial product designed for homeowners aged 60 and over, that enables them to access a portion of the equity in their home. This type of loan provides retirees with access to much-needed funds, offering greater financial flexibility to cover unexpected expenses, enhance quality of life, or simply make retirement more comfortable.
The key advantage of a reverse mortgage is that it allows you to stay in your home for as long as you choose while still retaining full ownership. Unlike selling your home or downsizing, with a reverse mortgage, you don’t need to move out but can stay in the community you know and love, close to friends, family and familiar surroundings.
How does it work?
With a reverse mortgage, funds can be accessed in a variety of ways, such as a lump sum, regular payments, or a line of credit that you can draw from as you need to, giving you the flexibility to tailor the loan to your specific needs.
You aren’t required to make regular mortgage repayments and interest is calculated on the outstanding balance added to your loan each month. The total loan amount, including accumulated interest, is repaid when you permanently move out of your home and the property is sold.
Who are reverse mortgages for?
To be eligible for a reverse mortgage, you must be over the age of 60, own your own home outright, or have a mortgage that can be paid off by the reverse mortgage. The amount you may be able to access will depend on your age and the value of your home.
While reverse mortgages offer retirees a level of financial flexibility, they’re not for everyone. It’s important to weigh up the potential benefits with any drawbacks and to consult with a mortgage adviser or financial planner to determine if a reverse mortgage is right for you.
What are the benefits and drawbacks?
Pros
- You can live in your home and enjoy the benefits of your community for as long as you want.
- There are no regular loan repayments, and interest is calculated on the balance outstanding and added to your loan.
- The amount required to repay your loan will never exceed the net sale proceeds of your property.
Cons
- Interest compounds over time which means the amount owing increases quickly, reducing the equity left in your home.
- When the home is eventually sold, the loan and accumulated interest must be repaid, leaving less for your heirs.
- Reverse mortgages often come with higher upfront costs compared to traditional loans.
- The amount you can borrow is usually capped at a percentage of your home’s value, depending on your age and the lender’s criteria.
- The funds from a reverse mortgage could affect your eligibility for government benefits, such as New Zealand Superannuation.
Expert advice about Reverse Mortgages
Whether you’re planning to pay for medical care, renovate your home to improve accessibility, or enjoy a well-deserved holiday, a reverse mortgage could provide the financial freedom to do so without needing to sell your home.
To find out whether a reverse mortgage is right for you and to get advice about applying for a reverse mortgage, contact Mortgage Express today and connect with a mortgage adviser near you. The team at Mortgage Express works closely with lenders who specialise in reverse mortgages and can help you find the right financial solution to fit your situation.
