So, what\u2019s a reverse mortgage? A reverse mortgage converts home equity into spending money in retirement. It\u2019s 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 \u2013 their family home.<\/p>\n
Welcome to the equity\u2011rich, cash\u2011poor dilemma. It\u2019s no problem when you\u2019re working, but if New Zealand Superannuation is the only income you have, well, you just might be living inside your solution.<\/p>\n
For more than 25 years now, reverse mortgages have been the \u201cother\u201d solution, next to selling and buying something cheaper or even renting.<\/p>\n
Many retirees aren\u2019t 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 \u2013 which is exactly why it\u2019s worth asking how we ended up here in the first place.<\/p>\n
Back when dollars went further, a mortgage\u2011free 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\u2011edged sword that made property owners \u201cwealthy\u201d on paper but also made everything more expensive.<\/p>\n
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?<\/p>\n
If you\u2019re rich in home equity, but lacking in the spending money department, what\u2019s the best choice?<\/p>\n
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\u2019t need repayments, so interest is added to the balance, so the total cost can really add up.<\/p>\n
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.<\/p>\n
You can take a lump sum, or, if you don\u2019t need it all now, keep most of it as a \u201ccash reserve\u201d or drip\u2011feed 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\u2019s usually just a case of clearing the balance plus modest discharge and legal fees.<\/p>\n
Once you\u2019ve 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.<\/p>\n
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\u2019s value), but it still means the kids get less than if you sat tight and suffered quietly.<\/p>\n
Talk through your options with them, regardless, including alternatives if a reverse mortgage doesn\u2019t fit. In many families, the kids are fine with Mum and Dad spending the equity, as long as they\u2019re confident their parents will be okay.<\/p>\n
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.<\/p>\n
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\u2011feed. Put bluntly, you\u2019re choosing how much of your house to convert into spending money today, and how much to leave the kids tomorrow.<\/p>\n
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.<\/p>\n
If you\u2019re sitting in a million\u2011dollar 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\u2019t really understand.<\/p>\n
Do a bit of reading about it, have some conversations, and you\u2019ll end up making a good call. The real risk isn\u2019t using a reverse mortgage or rejecting it on principle \u2013 it\u2019s drifting into retirement without a plan for how your home, your income and your family all fit together.<\/p>\n