When equity release can go wrong
James and Mary took out a line of credit when James retired, 12 years ago. The amount borrowed was the maximum they could borrow for their age at $50,000 and they used it to re-roof the house, buy a new car and take an extended overseas trip. But that was 12 years ago. The average interest rate on the loan has been 9% a year and the loan is now worth $141,000 and growing. The house is now worth $500,000. Their overall equity has therefore increased by $59,000 but they are again short of cash.
James and Mary have no other income and are struggling to pay the bills on New Zealand Super of about $420 a week. Their rates are now $2,000 a year and when that bill and the house insurance bill of $400 arrived in the same week, James “decided” to let them go unpaid.
Two months later, James and Margaret received a letter from their line of credit provider. It said that, unless the rates and insurance bills were paid immediately, the mortgage might be “called in” and the house sold to repay the loan.
James and Margaret were understandably alarmed and, after talking it over with their son Richard, went to see their lawyer. He confirmed that they could lose their home under a mortgagee sale if the rates and insurance weren’t paid. Fortunately, son Richard helped them out but it did frighten James and Margaret so they decided to work out a detailed budget so they wouldn’t run into this problem again.
