Money – Borrowing in retirement

It’s becoming common for people to be turned away by banks when they wish to borrow against the house because banks are not comfortable lending to people whose sole income is national super. Although it is against the law to discriminate on the basis of age, the lending policies of our banks do just that. The responsible lending code, which places an emphasis on proving that a borrower has the ability to make loan payments without causing undue hardship, has given lenders an easy out in declining loans for our seniors. Are our senior citizens really such a bad credit risk? Are they really going to miss loans payments and put the house on the line, something that they have worked hard for most of their lives?

In the eyes of most banks, they must be a bad credit risk because if you have tried to borrow from them, and you are over 65, chances are you have been declined. Is 75 the new 65? I have seen an increasing number of people continuing to work well into their seventies, mainly because they want to rather than need to. Many senior people hold the bulk of their wealth in their home and this is effectively locked up with banks unwilling to lend to people over 65 due to the perceived inability to make the loan payments.

Increasing property values have seen the costs just to stay in your own home increase.

Council rate rises, rising insurance costs, power, phone and water, and just basic maintenance costs have all risen and are putting financial pressure on retirees whose income from government super has remained stagnant. So, what are your options with regards to being able to release some cash from your home without impacting on your ability to live comfortably? RAM mortgages or Reverse Annuity Mortgages, as they are commonly known, are a relatively new product in NZ (about 25 years) but have been offered in other countries such as the US, UK and Europe for decades and are quite commonplace. A RAM mortgage allows you to borrow against the equity in your home (at a very safe level for the lender) for any worthwhile purpose. The key point to a RAM mortgage is that you don’t make any payments towards the loan – the interest that is calculated on the daily outstanding loan balance and charged to your loan monthly (so what you owe increases monthly).

As a result, the loan amount increases and the equity you have in your property decreases. There are also now loan providers (via the peer to peer lending system) who will lend to seniors under normal payment terms (not capitalising interest, so the loan does not increase over time) and at reasonable interest rates. Their tag line is, ‘We understand you have been an excellent bet all your life and that nothing has changed’.

There are around five providers (banks, finance and peer lenders) offering these types of loan in NZ at present. All have different features and benefits, and it’s worthwhile researching which option fits you best before making any decisions. I would recommend that you have a round table discussion with all family members who may have a future stake in your estate. Explore all other financial avenues if there is a pressing financial expense or purchase. Perhaps the family is able to assist, so you can avoid having to borrow. Can you sell other assets to cover the cost?

Explore options from a few providers and compare products, rates charges and the flexibility of the product. I personally think these products have great benefits if used wisely. When you have worked hard all your life, why not stay in the home you love but enjoy your twilight years by doing the things you enjoy. If that means the kids get less of an inheritance, then so be it.

Grant Clifton, Countrywise Financial countrywise.co.nz