A new report from the Retirement Commission (Do New Zealand Home Equity Release schemes provide value for money? September 2024) suggests that up to one in four older Kiwi households could benefit from using reverse mortgages to help make ends meet.
Currently, around 65% of New Zealanders over 65 own their own home mortgage-free, with an average of $600,000 in equity. Yet many of these homeowners have limited savings and rely solely on NZ Superannuation, making day-to-day living difficult.
Despite their potential, reverse mortgages and recently introduced equity-sharing schemes make up just 1.4% of total home lending. These products can be a lifeline for those who are asset rich but cash poor, and who don’t need to preserve their home equity for bequests or future care costs.
However, reverse mortgages come with important caveats. They typically carry higher interest rates, and the compounding nature of that interest can quickly erode home equity. Interest rates on NZ products are also notably higher than in Australia, the UK or US. Reverse equity mortgages tend to be more cost-effective when interest rates are low and house prices are rising, as this can help offset the effects of compounding interest on the homeowner’s equity. However, these market conditions can change significantly over time.
Equity-sharing schemes offer a different approach: the homeowner sells 35% of their home’s value for a discounted return, usually around 25%, which drops to approximately 23% once annual fees are deducted. The purchasing power of the income received from the sale of the equity share also reduces in value over time as the income is fixed.
Given the long-term impact on financial security, independent legal and financial advice is essential before proceeding with either option.
If you’re exploring ways to unlock equity in your home, get in touch – we’re here to help.