Financing options for the elderly

The cost-of-living crisis is affecting us all in one way or another, and our elderly folk are not immune.

Not surprisingly, we are hearing about more and more people who are, at the very least, considering taking on a reverse mortgage. So what are they, why would you and are they the only option?

A reverse mortgage, in simple terms, is where you borrow funds against the value/equity that you have in your property. The amount that you can borrow is dependent on your age and the value and type of your property. You must be at least 60 years old and your property needs to be mortgage-free or close to it and not all banks offer them.

A reverse mortgage frees up the equity in your property and you can use the funds for whatever you would like. However, they are not for everyone. Firstly, your loan accumulates interest, so depending on the length of your loan and given the interest compounds, by the time you sell your property you may well have lost a lot of money. Secondly, often quite significant fees are payable at the outset and while these are often added to the loan, they attract interest over the term. There are also restrictions, for example, you may not be able to rent out your home, or travel or move into care without firstly selling your home and paying back the loan. Put simply, they are costly.

And there are other options. For example, it may well be that selling your house and downsizing is a better long-term option, as your capital isn’t going to be eroded over time with the compounding interest. Perhaps your family could assist by purchasing a share in your property? Or perhaps home reversion products are something you could consider?

Home reversion products are relatively new in New Zealand, but they are common elsewhere in the world. Under this type of arrangement, you sell a portion of your home to the provider and, in return, they provide you with a lump sum payment or regular income. Under this arrangement you co-own your property with the provider, but you get the right to live in your home for the rest of your life. However, they too are not all rainbows and unicorns! For example, if you change your mind, you will need to purchase your property back at the then market value. Or if you do sell, you obviously don’t get the full benefit, as the provider will take their share. And like reverse mortgages, there are often hefty fees that need to be paid upfront.

Financial commentators are often extremely critical of reverse mortgages and home reversion products, and caution that they should be a last resort. This may or may not be the case, but regardless, you need to be very careful about entering into these type of arrangements without first obtaining independent legal and financial advice.