Do your homework on reverse mortgages

If you’re over 60 and own a house or other property, a reverse mortgage can seem an attractive option to help fund your retirement or pay for a major expense. But make sure you know the full costs and check out all your options before you sign on the dotted line.

Reverse mortgages are the most popular form of ‘equity release’ in New Zealand. With a reverse mortgage you borrow an amount against your property either in a lump sum or by drawing down on the loan as and when you need the money.

When you die or the property is sold, the full loan plus interest has to be repaid.

You might be considering equity release if you:

• own a property
• have a major expense (such as re-roofing your home) which you cannot pay for out of your normal income and/or are having difficulty paying for your day-to-day expenses
• are comfortable with the fact that you won’t be passing on the full value of your property through your will.

However, there are other ways to generate income from your home - such as trading down your house, subdividing a property or taking in a tenant.

Reverse mortgages usually charge a higher interest rate than normal loans on property. The interest compounds so a higher than normal interest rate can build up very quickly.

You can find out the effects of compound interest by using our Quick reverse mortgage calculator. Sorted also has information about other equity release options.

If you are seriously thinking about taking out a reverse mortgage, talk about it with your family and get independent legal advice. Make sure you understand how the product works and what it might cost (the interest rate and any fees charged).

You should also consider taking professional advice from a financial adviser with experience in equity release products.
 
Published 1 July 2008