April 4, 2025

Understanding Reverse Mortgages: How They Work and Who They Are For

Many homeowners in retirement find that everyday costs can become difficult to manage on a fixed income.

New Zealand Superannuation can fall short of covering medical expenses, home maintenance and unexpected bills. A reverse mortgage may provide an answer by releasing funds from the equity in your home, letting you remain in familiar surroundings while accessing extra cash. This guide explains how reverse mortgages operate, their advantages, and important considerations.

What Is A Reverse Mortgage?

A reverse mortgage is designed for homeowners (usually aged 60 and above) who wish to unlock a portion of the equity tied up in their property. Unlike downsizing or selling, you remain in your home with full ownership rights. The loan can take the form of:

• A single lump sum
• Regular instalments
• A line of credit that you draw on when needed

No regular repayments are required, and interest is added monthly to the outstanding balance. The full amount, including any accumulated interest, is usually repaid when you permanently leave or sell the property.

Reasons for Considering a Reverse Mortgage

• Cover Unexpected Costs
  Paying medical bills, carrying out home renovations or improving accessibility can become more manageable.
• Supplementing Retirement Income
  If NZ Superannuation is not sufficient, a reverse mortgage can boost daily cash flow while you maintain your existing lifestyle.
• Staying in Familiar Surroundings
  You can remain in the community you know, near friends, family and other support networks.

How Reverse Mortgages Work in Practice

1. Eligibility
   Homeowners typically need to be at least 60 years old. You must own the property outright or be able to settle any remaining mortgage from the new loan.
2. Borrowing Limits
   Lenders consider age, house value and risk. The older the borrower, the more equity is often accessible.
3. Interest and Repayment
   Compounding interest means the loan grows over time. There are no regular repayments due until you depart or sell the home.
4. Retaining Ownership
   The property remains in your name, and you choose how long you stay there.

Potential Benefits

• No Move Required
  Retain the comfort and stability of your home without uprooting your life.
• Flexibility of Funds
  Choose to receive a lump sum, small ongoing payments, or a drawdown facility.
• Equity Guarantee
  Depending on the lender, you may be protected from owing more than your home is worth at final settlement.

Possible Drawbacks

• Compounding Interest
  The longer the loan remains active, the faster it grows and reduces the equity you leave behind.
• Upfront and Ongoing Fees
  Reverse mortgages usually carry higher initial and ongoing costs compared to standard mortgages.
• Impact on Inheritance
  Less equity is likely to remain for future heirs once the loan is eventually repaid.
• Effect on Government Support
  Drawing funds through a reverse mortgage can influence eligibility for some government benefits.

Seeking Professional Guidance

Before deciding on a reverse mortgage, it is wise to speak with:

1. A Mortgage Advisor
   An advisor can help compare different lenders’ terms, assess your eligibility, and answer your questions.
2. A Financial Planner
   Professional advice can explain how a reverse mortgage fits into your retirement planning.
3. Your Family or Trusted Support Network
   Transparency may clarify any long-term consequences, such as the impact on future inheritance.

Take the Next Step

Reverse mortgages suit homeowners who want or need extra funds in retirement without selling or moving. Although this approach can unlock the value in a home, it requires careful evaluation of interest charges, future financial stability and personal objectives.

Capital Advice is here to assist you with exploring the feasibility of a reverse mortgage and to discuss other ways of optimising your retirement finances. We liaise with lenders experienced in this field and guide you through the considerations to help you make a fully informed decision.

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