Are reverse mortgages viable for asset, rich, cash-poor retirees?
Central Otago Mayor Tim Cadogan's recent suggestion that pensioners use reverse mortgages to manage rising living costs has been met with backlash.
The idea to reverse your mortgage, which you had just spent your whole working life paying off, only to decrease your children’s inheritance and invite risk and financial burden into your golden years, may seem counterintuitive to some.
But as New Zealand's population ages, with one in five expected to be over 70 by 2066, the ability to age in place will become increasingly important – and financial products that assist with this may be worth being discussed.
Sophie’s choice: Borrowers faced with heat or homes
The situation started when Cadogan (pictured above) attended public meetings about a proposed 18% increase in rates for the Central Otago district, which will likely jump up to 30% in some of his district.
“I had a number of individual pensioners tell me this was going to hit them very hard,” Cadogan said. “They said these rises, alongside all the other rises they are facing, would impact on their ability to feed themselves and heat their homes. I found this distressing but not surprising.”
In a podcast with RNZ, Cadogan said there is a “perfect storm” of factors that hit New Zealand councils pushing them to hike rates. For homeowners, this has left some with a choice between paying the electricity and heating bills or paying rates.
“They are [in] an asset-rich, cash-poor situation, but there is a way of flipping this – an absolutely unpalatable way – and I totally understand people who have probably worked very hard throughout the course of their life to get mortgage-free and not want to go backwards,” said Cadogan.
“But in a desperate situation where people are talking about food and heating, there is a horrible option that’s there to consider.”
The public reaction was “vehement”, according to Cadogan. Some waved away the “ridiculous” suggestion and put the onus on councils to do more while others had suggested the mayor had “lost touch with reality”.
Hell hath no fury like a LinkedIn comment section
In response to the vitriol, Cadogan took to LinkedIn.
“Here’s my question – did I get this wrong? When I made the suggestion, I knew that there was very little likelihood that the rates increases wouldn’t be coming as my council is united in not passing today’s costs of our services onto the future and is confident what savings that can be made in an Annual Plan year have been made,” the mayor said in a LinkedIn post.
“Should I have given false platitudes, saying ‘I’ll see what can be done’? Should I have just said ‘I’m sorry to hear that but there’s nothing I can do’? Or was I right to listen with empathy and try to help with a solution?
“Or is there another option or way forward that I’ve missed?”
LinkedIn responded.
Mortgage adviser Andrew Kay said he understood where Cadogan was coming from and supported his stance in offering solutions outside the norm to help with today’s cost of living.
“But reverse mortgages are not for everyone and certainly should be promoted as such,” Kay said.
“I wouldn't say you were out of touch. I would say perhaps you don't fully understand the product of a reverse mortgage and the financial implications that come with it.”
The pros and cons of reverse mortgages
Research shows mixed feelings about equity release products in New Zealand.
Some see them as a lifeline, particularly in later retirement when savings dwindle. They can help retirees maintain their desired lifestyle.
However, others view equity release with caution.
Some worry it will leave less to inherit, while others are hesitant to take on debt later in life. Often, people access equity release due to unforeseen circumstances, like a health crisis, rather than as part of a planned retirement strategy.
“After taking out a reverse mortgage, it is my understanding that it is unlikely they will have enough equity to later relocate if and when they can no longer safely navigate their environment due to barriers such as stairs, slopes, or split-level utilities,” one LinkedIn comment said.
“If considering a reverse mortgage, it is my suggestion that the person/people concerned should be certain they are in a 'forever-home' without barriers to access.”
There is, however, an increased use of advisers by ageing cohorts and a growing awareness and acceptance among advisers of these products, according to reverse mortgage provider Heartland Bank - which may inform the degree of future demand for the various home equity products.
“As leading providers, Heartland Finance and Heartland Bank are proud to provide a solution which can help Australians and New Zealanders remain in their home, and live a more comfortable retirement,” said Yardley.
Other options: Downsizing and rate postponements
Another seemingly obvious solution to this problem is downsizing.
Downsizing has the benefit of allowing older Kiwis to live in homes that are easier to manage while potentially freeing up equity.
It can involve moving to a smaller, more manageable home, which often leads to easier maintenance and lower costs.
One LinkedIn comment said that while reverse mortgages should be considered by those asset-rich enough to do so, downsizing should also be considered, especially for empty-nesters with three-plus bedroom homes.
However, research has suggested that moving often involves upgrades and costs a significant amount.
Suitable housing options may not also be available, and the emotional attachment one feels about their family home is a massive barrier to cross.
One council worker in the comment section suggested that rates postponement is another viable option for asset-rich, cash-poor retirees.
For example, the Christchurch City Council introduced this measure in 2017, where ratepayers aged over 65 and living in their home could postpone paying their entire rate bill indefinitely, up to 20% if the property’s value.
The drawback is the loan would have to be repaid when the home was sold and there is annual interest and an administration fee charged.
The comment said that while there wasn’t a “huge take up” initially, it was a good option for those wanting to stay in their homes.
“Maybe changing the language from reverse mortgage to rates postponement would help?”
The bottom line
Historically, reverse mortgages have soared when the cost of living increases. For example, midway in 2022, Heartland Bank saw a 55% increase in the proportion of reverse mortgages being used to repay debt.
With the economy expected to get worse before it gets better, and the majority of New Zealanders who are increasingly aging wanting to live in their family homes, the conversation around viable solutions for ageing in place must continue.
