Reverse mortgages

Mary Holm talks about reverse mortgages, which are seen as a way to free up money for retired homeowners.Mary Holm talks about reverse mortgages, which are seen as a way to free up money for retired homeowners, but she warns people should take care if they're considering this.She explains there's been growing interest in these mortgages, with Heartland bank recording 39 percent increase in inquiries for the first quarter of this year compared with the same period in 2020. Reverse mortgages are only currently offered by Heartland and SBS.This is a financial tool for the asset rich cash poor person, she says. Listen to the conversation"People say I'm asset rich and cash poor. And as I said with house prices, where they are now that's really a common situation."Reverse mortgages are a good way of releasing equity in your home to supplement retirement income, she says.She recommends that it is a strategy for older retired people, not those in their early 60s."You can get them from age 60 on, but as I say I reckon it's much better to spend all your savings and do whatever else you can to provide money for yourself until you're sort of 85 or 90, preferably."One exception to that would be people who have got big health problems and saying, Well, I'm not going to be alive at that stage in my life."They work by borrowing a sum, typically 15 percent of the house value, but you do not need to pay it back until the house is sold."Which sounds all quite nice, except that in the meantime, the interest on the loan is compounding. And that's why I don't like seeing people who are relatively young, 60 to 70, using it."I've heard of people in that sort of age group, saying this is great, I can borrow money and do all kinds of things. And I think be a bit careful, just be aware what you're getting into because they're floating rate loans."Historically very low at the moment, interest rates are likely to go up, she says. And reverse mortgage rates are higher than other mortgages anyway - around the high 5 percent mark.Once you have the loan, you can take it as a lump sum or as a weekly payment to top up your super, she says."And you can spend that money on whatever you want to, the bank is not interested in how you spend the money, their security is your house."You can blow it all on a big party if you want to!"At 60 you may be able to borrow 15 percent of the property value, at 80 or older up to half, she says. But beware the payments on the loan are compounding…Go to this episode on rnz.co.nz for more details