Up to 25% may benefit
New research indicates that home equity release products may offer a more cost-effective solution for older New Zealanders facing financial difficulties than taking on high-interest consumer debt.
The study, commissioned by the Retirement Commission and conducted by Motu Research, suggested that up to 25% of retired households could benefit from using home equity, particularly those with low income and savings but high home equity.
Understanding home equity release products
In New Zealand, home equity release products, like reverse mortgages and home reversion schemes, are underutilised and often misunderstood due to their complexity and associated 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.
Reverse mortgages allow homeowners to borrow against the equity in their homes, but interest costs can cause loan balances to grow rapidly.
“People opting for a reverse mortgage should consider only using the minimum they need to supplement their monthly income rather than larger lump sum withdrawals,” Reyers said.
Home reversion: Another option
For retirees seeking to preserve some home equity while accessing an income stream, home reversion may be a viable alternative. This scheme allows homeowners to sell a stake in their home in exchange for income, though at a discounted rate.
Despite the potential costs, Reyers noted that “for the group of retirees relying primarily on New Zealand Super for income who have home equity but no other assets... it is something to consider.”
Planning for different stages of retirement
Reyers encouraged retirees to consider home equity release products as part of a broader retirement plan.
Key considerations include the impact of equity release on future financial options, such as moving into retirement villages or covering healthcare costs, as well as the desire to leave bequests.
Seeking professional financial advice is critical for balancing current needs with future financial security.
The costs of equity release
Reverse mortgages can be costly, especially in high-interest environments, but they may still be a better alternative to other forms of debt. Reyers added that home reversion offers more stability, as it avoids compounding interest, making it preferable for those wanting to preserve equity for future needs or bequests.
Read the Retirement Commission media release here. You can also access the full report and policy brief here.
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