Equity release

Many people in retirement are "asset rich" but "cash poor". If you are aged 60 or over, you may be able to release some of the value you've built up in your home without having to move. This immediate lump sum is yours to use for whatever purpose you wish, and without having to make any loan repayments.

There are a number of equity release products now available in New Zealand. Some of the product names are reverse annuity mortgage, Lifestyle Security, Reverse Mortgage, Lifetime Loan etc. Contact me and I will be happy to discuss your requirements and help you obtain the right solution for your situation.

In this section, read about equity release/reverse mortgage loans, and consider whether it could be right for your situation.

How does Reverse Mortgage/Equity Release differ from a standard mortgage?

A reverse mortgage differs from a standard mortgage in that you do not need to make regular repayments at any stage during the life of the loan. Because you do not need to make any repayments, interest and fees are instead added (or 'capitalised') to the loan balance, and the loan balance therefore increases over time.

Who qualifies for a Reverse Mortgage/Equity Release loan?

Each lender has their own criteria, but generally you must be over 60 (or both over 60 in the case of a couple), and own your home. There is no requirement to be earning income, nor will you be required to prove a level of savings.

How much could I borrow?

Again, every lender has their own criteria. However, the amount of equity you can release will normally be calculated according to the age of the youngest borrower, and the value of your home. The older you are, the greater the percentage of equity you can release.

Case study

Many clients use an Equity Release loan to release equity from their current home for a variety of purposes. It can also be used to help New Zealand Seniors move home who otherwise would not have been in a position to afford too.

Jack is a 70 year old Widower with a freehold home on the outskirts of town. His home has a current market value of $300,000. The house is getting a bit hard for Jack to look after. The garden and lawns are difficult to maintain and the house will need to be painted again in a few years.

Jack would like to move closer to town to be near his Bowling Club, be able to walk to the shops and have the Health Centre nearby if he needs to visit the Doctor. The local real estate agent has found a suitable townhouse for Jack. Built using low maintenance materials, the townhouse is new and has a small garden with no lawns to mow. The price is $360,000. Jacks only form of income is Government Super and he has very little in the way of Savings. How can an Equity Release loan help Jack get into the home he wants?

Solution

Based on Jack's age (70)*, Jack could borrow a maximum 25% of the registered valuation of the townhouse. 25% of $360,000 = $90,000. This amount together with the proceeds from selling his home should see Jack into his new townhouse. Jack will not need to worry about repaying the loan as no loan payment is required until his new home is sold usually as a result of death or moving into long term permanent care.

How much equity will be left in my home?

The level of equity you retain in your home will depend on a number of factors:

  • The length of time your Reverse Mortgage runs for,
  • The level of future house price growth in your home, and
  • The interest rate charged on your Reverse Mortgage.

We can't predict what house prices will do in the future. However, New Zealand has enjoyed average capital growth of 7% for the past fourteen years in the major regions (Source: Real Estate Institute of New Zealand). However, this is no guarantee of what might happen in the future.

Lenders are conservative in the level of equity they will allow you to release, and therefore even modest levels of house price growth will assist in protecting the level of equity in your property.

If you would like further peace of mind about the percentage of equity left in your home, the equity protect option allows you to protect a chosen percentage of the eventual value of your home.

Am I selling a portion of my home under a Reverse Mortgage/Equity Release loan?

No. A Reverse Mortgage is a loan secured against your property - it is not a sale of your property. You continue to retain full ownership of your home, and enjoy the benefits of any future capital growth.

When do I have to repay the loan?

Lenders will typically require repayment of the loan, plus interest and fees, on either (a) the sale of the property, or (b) the passing away of the last surviving borrower, whichever occurs first. Some lenders require repayment should you move into long-term aged care.

Your estate will normally have a period of six months or more following the passing away of the last surviving borrower in which to arrange for repayment of the loan, usually (but not necessarily) from the sale of the property.

What if we want to move house in the future?

Most lenders will allow you to transfer your Reverse Mortgage to another acceptable property, subject to their conditions. This feature is known as 'portability', and is something you should ensure as part of your Reverse Mortgage contract.

Options for accessing your Reverse Mortgage funds

The options available to you are generally as follows:-

  • Receive all your Reverse Mortgage funds as a single lump sum on the settlement of the loan, often referred to as a 'lump sum' option
  • Receive a series of payments over an agreed term, often referred to as an 'instalment' option
  • Receive a funding limit under your Reverse Mortgage, from which you can draw funds from time to time as you need them, often referred to as a 'line of credit' option.

 

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"Sonya, thank you very much for the prompt action & professional service we received from you during our application for Sentinel finance. We are pleased to let you know that we have now been able to arrange long overdue improvements to our home, and we are now looking forward to an overseas holiday we have booked. Without your knowledge and management skills in organising the finance for us, neither of these things would have been possible. We thank you most sincerely for your kind and considerate visits, and the time you spent explaining the equity release process to us. We would wholeheartedly like to recommend your very efficient service and friendly manner to anyone who is thinking of applying for a lifetime loan."
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