Background
Recently there has been much comment about the ‘savings shortfall’ that many New Zealanders can expect to face in their retirement.
The issue has become an increasing focus of many in society, including the Government, senior’s organisations, seniors themselves and their families. The media is challenging the issue with increasing frequency, and there is much debate in the community as to how best to manage the issue.
There are a number of options available to seniors, their families and professional advisers to consider. These may include:
- Selling the home and downsizing to a smaller property
- Borrowing from the family
- Adjusting one's lifestyle to reduce daily expenses
- Returning to the workforce
- Releasing some equity from the sale of a portion of the property
- Releasing some of the equity in the home via a home equity release plan
Home Equity Release Plans
This option is becoming increasingly popular in New Zealand, and is based on similar concepts that have been available in the UK, USA, Canada and Australia for many years.
Some of the typical uses of the funds raised from a Home Equity Release Plan include:
- Home maintenance or improvements
- Long term care or medical expenses
- Supplementing your income
- Debt consolidation
- Supporting the kids or grandkids
- Holiday or travel
- Purchase of a car
A Home Equity Release Loan is usually structured as a loan secured with a first mortgage on your property, but unlike a traditional mortgage, no repayments are due until all borrowers permanently vacate the property. This will usually be when all borrowers have passed away, moved into long term aged care, or the property has been sold for any other reason, at which point the lender will seek repayment of the funds owing.
Funds released via the loan can be taken as a single lump sum, a series of installments or drawn down under a ‘line of credit’ facility. The options available will vary with each lender. Whilst most lenders will accept voluntary repayments, no regular repayments are required.
Interest and Fees
Because there are no repayments due whilst the borrowers are living in the property, interest and fees are added to the loan balance during this period. This is often referred to as the “capitalisation”, “compounding” or "rolling up" of interest and fees into the loan balance.
Repayment
Interest rates may be fixed or variable and where they are variable they may be ‘pegged’ to a particular benchmark or set by the lender according to market conditions.
Lenders may charge a range of fees to cover application, valuation (including regular updates), legal, administration and early repayment. Where interest rates are fixed there may be break fees for early repayment.
When the loan and all interest and fees are due for repayment, the borrowers or their estate will typically have the option of repaying the loan out in full and retaining the property, or selling the property and repaying the lender from the proceeds of the sale.
Loan Repayment Guarantee
A key feature and a requirement by SHERPA of its members is that the total loan balance repayable by the borrowers cannot exceed the net sale proceeds of the property at the time the loan is repaid.
This is commonly referred to as a Loan Repayment or No Negative Equity Guarantee. This means that provided the terms and conditions of the loan have been met, the lender cannot seek additional repayment from the borrowers personally, or from their estate, if the value of the property is insufficient to fully repay the loan.
In addition, this guarantee ensures that all borrowers or nominated residents have the right to live in the property for as long as they choose, even in the event that the total loan balance exceeds the property value.
Terms and Conditions
All lenders will make the loan available to you subject to a set of terms and conditions. This is an important document that you should read thoroughly, and seek advice on from your solicitor.
These may include, but not be limited to requirements that you as the borrower will:
- Adequately maintain the property
- Maintain an adequate level of buildings insurance on the property
- Notify the lender if there have been changes to the structure of the property
- Notify the lender if any additional permanent residents have moved into the property
These are all designed to protect the lender as first mortgagee and to protect the future realisable value of the property. Check with the lender what their specific terms and conditions are.