They share some similarities – both allow you to access the capital tied up in your home without actually moving out. Both have fees, Ts and Cs (e.g. minimum ages, specific types of properties) – and both will diminish the equity you have in your home, so less will be available to fund your future accommodation, or for an inheritance.
Crucial differences
A reverse mortgage involves taking out debt against your home – possibly a scary prospect if you’ve spent decades paying it off! But unlike a regular mortgage, you get the loan but don’t make any principal or interest payments (which is how it helps a tight budget.) Instead, that interest (currently 7.99%pa, but it’s a variable interest rate) is added to the loan, so you pay interest on that interest. The older you are, the more of your equity you can access, and how much it grows depends largely on how long you have it (and the prevailing interest rate). You can access it in a lump sum, in instalments or in an amount you can call on when needed. It’s repaid when you sell your home, or you die.
Home reversion differs because it’s not debt, so there is no interest to compound over time – which sounds very appealing. Instead, you sell a percentage of your home gradually over 10 years, and you receive a payment lower than the proportion you’ve sold. Plus, you’ve reduced your ownership, so you forgo any capital gain on the stake you’ve sold.
Home reversion is newer to the New Zealand market – Lifetime Retirement Income launched ‘Lifetime Home’ a year ago – so I think that warrants further explanation. Using their model – if you had a $1m home, you would sell 3.5% of its 2025 value each year for 10 years. In exchange, you’d receive 2.5% of that value, less fees – which nets you about $22,700 each year. My modelling suggests the effective annual cost is about 7.3% a year. After 10 years, you’ll have sold a 35% stake, so will only receive 65% of the proceeds when you sell, whatever its value is at that time – so there is potential upside (and downside) for the lender.
While home reversion is fairly new (to the New Zealand market, at least) reverse equity mortgages have been available here for decades – and sometimes when you mention them, people respond like you’ve used a dirty word.
Heartland, one of the few providers of reverse equity mortgages in NZ, told me “Reverse mortgages are misunderstood, in part due to how they were historically managed by other providers, including globally. Reverse mortgages are not what they used to be – they are very well regulated.” Heartland also offers a “no negative equity” guarantee, meaning you never owe more than the net proceeds of selling your home, and you could opt to protect a specific amount of equity.
So, which is a better bet?
Economist and founder of Equity Release NZ, Cameron Bagrie, told me recently on The Prosperity Project podcast that “A reverse equity mortgage tends to be more favourable financially out into about year eight. After year eight… the compounding of interest tends to kick in”.
So, how long you’re expecting to need the money for is one way to determine which might be a better fit – but there are variables.
With a reverse equity mortgage, rising house prices help preserve equity in your home to some extent by offsetting some of the interest costs. If house price growth is strong, it does a better job of that, but if house price growth is anaemic – as it is right now – less so. That said, you have to assume that if house price growth was rampant, higher interest rates would soon follow! With home reversion, if house prices are booming, there is a greater “cost” associated with the value of the stake you’ve sold, but you don’t have the concern of fluctuating interest rates and the loan growing rapidly.
Of course, both house prices and interest rates are generally fairly difficult to predict accurately!
If you need a large, lump sum to fund something immediately, a reverse mortgage may be a better fit – as long as you understand how fast interest can compound. If you don’t want to worry about compounding interest and want to know exactly how much of your equity you’re giving up – home reversion may the better option.
Neither is to be entered into lightly – and thankfully, both require you to seek independent legal advice – but they both offer potential solutions to the same problem of freeing up cash in retirement, without leaving your home. Just don’t confuse them with a free lunch – consider your options with clear eyes and good advice.
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