Paying down debt has become the most common reason retirees take out reverse mortgages, according to a bank.
Heartland Bank hit the milestone of approving 20,000 reverse mortgages earlier this year, with older homeowners borrowing against the equity in their homes and only paying them back when they decide to sell and move.
But home improvements and essential repairs are no longer high on the list of reasons people borrow against their homes later in life, says Andrew Ford, managing director of reverse mortgages at Heartland.
“Last year, debt consolidation and home renovations were about even. Debt consolidation has surpassed that,” he says.
“Debt consolidation now represents more than half of our loans; pay off an existing mortgage, credit card, pay off a personal loan.
Mounting evidence shows that more and more people are retiring in their late 60s or early 60s with debts such as mortgage debt and credit card debt.
Some extinguish these debts by downsizing and moving into a smaller house. But others are turning to reverse home loans, freeing them from the repayments they struggle to pay on low incomes.
“It can free up their cash flow,” Ford says.
It was traditionally thought that a combination of falling house prices and rising interest rates would lead to lower demand for reverse mortgages, but the rising cost of living and people’s rising debts retirement meant that wasn’t happening, Ford says.
Sometimes the debt is unpaid mortgage debt, Ford says.
Heartland charges borrowers a variable interest rate that can go up or down. Reverse mortgage debt increases as interest is added, and debt accumulates over time, but this did not tend to worry borrowers as the value of their homes rose rapidly and they saw the net worth they possessed stay on the rise, even though the amount they owed increased.
“These are really unusual times,” Ford says. “Rising house prices are really helping. Last year we saw record levels of applications, up 65% from the previous year.”
But despite clear signals that house prices are falling, demand for reverse mortgages is not.
“The reason we’re seeing unprecedented demand right now is inflation,” Ford said. “There’s a need out there, and it doesn’t matter what the price of your house has done.”
Inflation, including rising municipal interest rates, is putting a lot of pressure on asset-rich, low-income senior homeowners.
“It’s fine, if you have an investment portfolio and you have other sources of income, but if you’re on your own on NZ Super, higher inflation and higher insurance costs, that’s fine. be very tricky,” says Ford.
Money author Martin Hawes says taking a reverse mortgage is a big decision. “To those who have spent their lives getting rid of debt, remortgaging house cuts against the grain,” says Hawes.
“While it’s not my first way to get money or an income, I think it’s a very useful and practical safety net for those who think they’ll run out of money in retirement,” says- he.
The cumulative effect can have a significant impact.
“If your home was valued at $500,000 and you wanted to take out 20% as a reverse mortgage, the provider would advance you $100,000,” he says.
“Interest would be charged at, say, 6% per annum ($6,000 per year). In 20 years, when the house is sold, the bank takes back the original $100,000 plus accrued and compound interest of 220,000 $.”
Heartland says the average loan-to-value ratio of its loans was 9% at the start of the loan. The most common term for reverse mortgages was 7-8 years, and the average age people took out reverse mortgages was 72.
Real estate capital gains cannot be relied upon to offset rising debt, Hawes says.
Ford says people don’t tend to take all the money at once.
Nine out of 10 borrowers took out a loan, but only withdrew part of it, leaving the rest of the approved loan available to be spent later, if needed or wanted.
Some people have used reverse mortgages to fund essentials like health care. Others have used the debt for once-in-a-lifetime luxuries and experiences, such as a client who took out a reverse mortgage so they could attend the 2023 Rugby World Cup in France.
One in five arranges for monthly advances to help pay for living expenses, Ford says.
Hawes says some families run their own reverse mortgage programs.
“I’ve often seen people investigate reverse mortgages and discuss it with the kids only to find that one of the kids was ready and had the ability to step in and take on the role of the bank and finance their parents,” he says.
This is a direct reversal of “mom and dad bank,” he says.
“It seems like a good outcome to me provided the arrangement is properly documented and all family members are aware of what is going on,” he says.