By Emma Brannam
Senior citizens wanting to borrow against their homes to provide for a better environment, are being warned to take care.
The advice from financial experts and groups representing the elderly comes as the ASB announces it’s offering a reverse equity mortgage aimed at those over 65.
By retirement age many Kiwis own their home outright, but unless they’ve got good pension plans there is little cash left for those medical bills, holiday or new car.
Now ASB says it can help out. It’s the first major bank to introduce a loan aimed at over 65s, allowing them to borrow money against part of the equity they have in their home.
“By the time they get to retirement age, all of their retirement nest egg is tied up in their home and what our customers have been telling us is that they want to have a product from someone they know and they trust,” says ASB Bank spokesperson Catherine McGrath.
But Age Concern and Grey Power are urging caution, while some financial experts believe there serious pitfalls with these kinds of loans also known as reverse mortgages.
“The risks are much larger the younger you are and there is a risk that baby boomers who have inherited a lot of wealth through the property boom could decide to take these out quite young,” says business commentator Bernard Hickey.
Part of the problem is that people can outlive the life of their loan.
Take a 65-year-old with a home worth $500,000 and no mortgage.
If they borrow $20,000 a year, on an interest rate of 7.5 percent, they’ll run out of money in 14 years – around six years sooner than their average life expectancy.
“If you’re quite old and five years or so from passing on, then it may make a lot of sense to use the money for medical care, or going into retirement or whatever and being able to stay in your house,” says Mr Hickey.
ASB says it will make sure borrowers know all the risks and they’ll never have to repay more than the value of their property.
“It is a really considered process that people go through,” says Ms McGrath.
“They have to have independent legal advice. We encourage them to talk to their family, because that’s really important too. We have those protections built in like the ‘no negative equity’ guarantee and the ‘lifetime occupancy guarantee’.”
It says this kind of mortgage is only suitable for those with no other means of accessing cash, so it will definitely suit some. But could mean there’s little inheritance left for the kids.
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