Home equity release as an income solution
New research commissioned by the Retirement Commission suggested that home equity release products could offer a viable alternative for older New Zealanders with limited retirement income but substantial home equity.
The study, conducted by Motu Research, found that around 25% of retired households might benefit more from using home equity release options instead of high-cost personal loans or credit cards.
Understanding home equity release options
Home equity release products, including reverse mortgages and home reversion schemes, allow retirees to access the value of their home for additional income. However, these products are often misunderstood in New Zealand due to their complexity and costs.
“The key to using home equity release products is understanding the costs and benefits and seeking financial advice to see if they are right for you,” said Michelle Reyers (pictured above), policy lead at the Retirement Commission.
Costs and considerations of reverse mortgages
Reverse mortgages allow homeowners to borrow against their home’s value, with the loan amount increasing over time due to compound interest.
Reyers advises retirees to consider withdrawing only the minimum needed to supplement their monthly income to minimize the rapid growth of interest.
“People opting for a reverse mortgage should consider only using the minimum they need... as this will slow the rate at which the interest owing builds up over time,” she said.
Home reversion as an alternative
Home reversion schemes, where a portion of the home is sold in exchange for income, offer another option for retirees looking to access equity while retaining a stake in their property.
This can be a suitable choice for those who wish to avoid the compounding interest associated with reverse mortgages.
However, homeowners receive less than market value for the share they sell, which impacts long-term financial planning.
Strategic use of home equity release
Despite the costs, home equity release products can be a strategic option for retirees who rely primarily on New Zealand Superannuation and want to stay in their homes.
Reyers stressed the importance of considering the impact on future financial needs, such as moving into a retirement village or covering healthcare costs.
She advised seeking professional advice to balance current income needs with maintaining sufficient equity for later stages of retirement.
Impact on future financial security
Releasing home equity now can affect financial stability later in life, particularly if circumstances change or if retirees wish to leave a bequest.
Home equity release may reduce the amount available for inheritance, so careful planning is essential.
“Balancing whether you can afford to use some equity now but maintain the required level of equity in your home for another stage of retirement should your health or life circumstances change may require professional advice,” Reyers said.
Final considerations for retirees
For those considering these products, it’s important to weigh the pros and cons, including how they may impact future financial decisions and inheritance plans.
With rising living costs and limited income options, home equity release could provide much-needed financial support for retirees struggling to make ends meet, provided they fully understand the long-term implications.
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