So, what’s a reverse mortgage? A reverse mortgage converts home equity into spending money in retirement. It’s for those who got rid of their mortgage instead of investing elsewhere, leaving them with a serious concentration of wealth in an illiquid and indivisible asset – their family home.
Welcome to the equity‑rich, cash‑poor dilemma. It’s no problem when you’re working, but if New Zealand Superannuation is the only income you have, well, you just might be living inside your solution.
For more than 25 years now, reverse mortgages have been the “other” solution, next to selling and buying something cheaper or even renting.
Many retirees aren’t ready to move out of their home, and the thought of starting somewhere else feels worse than the idea of borrowing. At the same time, many feel strongly about not being in debt in retirement – which is exactly why it’s worth asking how we ended up here in the first place.
Back when dollars went further, a mortgage‑free home, a vege garden and government superannuation might have been enough. But inflation steadily stripped away the value of our dollars. Expenses grew faster than incomes, and many home owners underestimated the double‑edged sword that made property owners “wealthy” on paper but also made everything more expensive.
So, to really benefit from property wealth in retirement, there are two mainstream choices: sell up, or take out a reverse mortgage. Feed the real estate industry, or the banking industry?
If you’re rich in home equity, but lacking in the spending money department, what’s the best choice?
To answer this, start with cost and flexibility. The cost is your interest bill, driven by the rate and how long you need the money. Reverse mortgages don’t need repayments, so interest is added to the balance, so the total cost can really add up.
Capital gains, if they happen, can take some of the sting away, but as an example, a $100,000 loan today might still grow to over $700,000 in 20 years. The cost can be significant, but here comes flexibility to the rescue.
You can take a lump sum, or, if you don’t need it all now, keep most of it as a “cash reserve” or drip‑feed it as regular income, which generally costs less than drawing the full amount from day one. That flexibility extends to repayments too: if you downsize, get a windfall, or after you die, it’s usually just a case of clearing the balance plus modest discharge and legal fees.
Once you’ve done some basic research on how reverse mortgages work, if you have kids, the next step is to arrange for a meeting to workshop some questions.
How would taking out a reverse mortgage make your lives better? How will this affect your kids and what they will inherit? There are safeguards to stop you ending up in negative equity (where the debt becomes larger than the property’s value), but it still means the kids get less than if you sat tight and suffered quietly.
Talk through your options with them, regardless, including alternatives if a reverse mortgage doesn’t fit. In many families, the kids are fine with Mum and Dad spending the equity, as long as they’re confident their parents will be okay.
After the family discussions, check in with a financial adviser, but be aware that some advisers receive a fee from the reverse mortgage provider to have this conversation with you.
Here you can learn how much of your home you can borrow against, which is the best provider for you and what it will cost if you draw a lump sum versus a drip‑feed. Put bluntly, you’re choosing how much of your house to convert into spending money today, and how much to leave the kids tomorrow.
In the end, a reverse mortgage is just one more tool in a system that already favours rising house prices and rewards those who play the game, not just grind away the debt.
If you’re sitting in a million‑dollar solution but counting every dollar at the supermarket, refusing to touch the equity can be just as irrational as signing up blindly to a new mortgage thing you don’t really understand.
Do a bit of reading about it, have some conversations, and you’ll end up making a good call. The real risk isn’t using a reverse mortgage or rejecting it on principle – it’s drifting into retirement without a plan for how your home, your income and your family all fit together.
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