Spending "your" inheritance
If you were counting on a slice of mum and dad's house when they pass away - think again.
Many senior citizens are asset rich, but cash poor and to free up some capital and make life a little easier they are taking out reverse mortgages.
Ray and Jackie Boyce fit into that category. They could have downsized their home, sold up and moved on, but that would have meant leaving things behind.
So instead they took out a reverse equity mortgage, something the Boyce's say has allowed them to have their cake and eat it too.
The question though, is how do people maintain a mortgage on a pension?
The secret is they don't have to.
This is how it works.
Take the example of a retiree living week to week on superannuation, in a freehold home valued at $200,000.
At the age of 60 with a Sentinel (Sentinel is New Zealand's largest provider of reverse mortgages) scheme the retiree can borrow 10% of their home's worth - in this case $20,000. it is a lump sum that is paid directly to them.
When they turn 70 they can take up to 20% of the home's value, 30% by age 80 and at a massive 40% by the time they turn 90.
No repayments are due until the person either dies or sells up. That is when the loan company will claim it's share, which is the principal borrowed plus the accumulated interest.
Investment Guru Gareth Morgan has looked into the loans and can see their appeal
"I mean logically you don't want the day you die to be your richest -unless your nuts - the ideal life is the day you die you spend the last cent of equity, or actually if you're smart the last cent of debt you can get your hands on the contracts do have a safety clause - you can't be thrown out of your house," says Morgan.
Boyd Klap, 78, is the chairman at Sentinel and he told Close Up he is the recipient of many letters and thank you notes from happy clients.
"The general attitude of people in their 30's, 40's, 50's is well, let them enjoy themselves they worked hard for it and in many cases the kids are better off than their parents anyhow," Klap says.
Gareth Morgan agrees.
"These days people don't generally want to leave a huge inheritance for their children. They've done their investment in their kids through getting them into tertiary or whatever they've done - helping them into business.
It's not like the old days where they had to leave a huge capital sum for them so they could go buy a farm or whatever - things have changed," Morgan says.
But with the commendations come some words of caution.
Rising interest rates and falling house prices could eat up equity - 20% borrowed in the beginning could blow out in a hurry.
Interest rates on a reverse mortgage are floating and generally up to 2% higher than the going rate.
"You've got to be certain about what you're doing otherwise uncertainty in interest rates and house prices can just destroy your plans," says Morgan.
His advice is that it is better left until later on in life.
"Granny in this case, she might be sitting there at 65 thinking 'oh well i'm on my last stretch so I'll start eating my house' and suddenly she finds she's 75-80 and she's as fit as a fiddle and wants to do things and she's just got it wrong, well she's trapped," Morgan says
He says there nothing wrong with the product, but tread very gently and be very conservative as to how much you take.
The Office for Senior Citizens is writing up a code of practice for this relatively new industry and more information is available at the Retirement Commission.
Source: One News
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