A New Way To Eat a Home

"40% of those aged 65 or more have virtually no other income other than superannuation’"

– Retirement Commission

Elderly homeowners who are asset-rich but income-poor now have a new way to maintain a reasonable standard of living while continuing to live in their homes.

Debt-based reverse mortgages have been available for years to those aged 60 or more: Heartland Bank is the main provider in New Zealand, with SBS Bank also offering them.

Generally, the existing reverse-mortgage products offer lump sums, although they can be drawn down gradually to finance everyday expenses.

But Lifetime Retirement Income now has a new product, dubbed ‘Lifetime Home’, which allows seniors over 70 to sell some of the equity in their homes and convert it to a supply of regular income to supplement superannuation. It’s the first time a debt-free equity-release option has been available in New Zealand.

All three companies offering these variations of equity-release products provide their customers with a guarantee that they will never be turfed out of their homes, but the reverse mortgage arrangements may take all their equity.

The two reverse-mortgage offerings come with a guarantee that customers' liability will never exceed the value of their house – but, because no repayments are required until the home-owner either dies or sells their home, interest on the amount they borrow does continue to compound, meaning the person has no idea what their ultimate liability will be, and hence how much of their equity will be eroded.

The new option

Lifetime's new ‘debt-free’ equity-release option guarantees its customers will always own at least 65% of their homes.

Essentially, once a valuation is agreed upon, Lifetime buys some of the equity in a person’s home, typically 35%.

The ‘purchase price’ is discounted, in exchange for then paying the homeowner a fortnightly income to supplement superannuation.

Needed: income off the house

Economist Cameron Bagrie, an independent committee member of Lifetime's board, crunched the numbers and found about 60% of retirees depended largely or entirely on income from the Government's New Zealand Super. An estimated 80% currently owned their own homes.

For many, the home was their only asset, although some were still repaying a mortgage when they retire.

In 2021, household net worth statistics showed those aged over 65 still held about $6.5 billion in home loans - on houses worth $185 billion - and that their home accounted for about 25% of their total net worth.

The median net worth in 2021 of individuals aged between 65 and 74 was $454,000, while those aged 75 or more had a lower median net worth of $414,000.

Bagrie says the decline in net worth over time reflects people running down their assets to fund their retirement - and possibly intergenerational transfers, such as assisting children to buy their own homes.

Superannuitants have faced a higher effective rate of inflation between 2008 and 2022 of 2.4% a year, compared with 2.1% for the general population, and Bagrie expects that to continue, especially since rates and insurance costs continue to rise faster than general inflation.

The Massey University Retirement Expenditure Guidelines, published in October last year, found that a couple living in a metro area with a “no frills” lifestyle with few, if any, luxuries, needed $982.02 a week to survive when the weekly rate of their New Zealand Super was only $763.64 (it has risen since with the latest cost of living adjustment, but so have costs).

Clearly, they would need at least an extra $218.38 of income from other sources each week to make ends meet.

“Most New Zealanders aspire to a better standard of living in retirement than can be supported by New Zealand Superannuation alone,” the Massey report notes.

Bagrie points to Retirement Commission work showing 40% of those aged 65 or more have virtually no other income other than superannuation, and that another 20% have only a little more additional income.

A more comfortable retirement

Clearly, something has to fill the breach, and that's what the new Lifetime product is designed to address.

“These products, if they're used well and sustainably, can give people a more comfortable retirement,” Bagrie says, adding that there will always be pros and cons.

“Any product like this carries a cost – there's no free lunch,” he says.

“Where I get frustrated is people don't acknowledge the reality for many retirees.”

But reality also presents an opportunity: the rapid growth in house prices means many are sitting on a lot of equity.

Bagrie believes younger people, who are used to having to take on debt, are likely to be more receptive to such products when they're older and less likely to be worried about their children's inheritance.

“I don't think they're going to be afraid of these products.”

Presenting details of the new product at the TMM Better Business conference in February, Lifetime told advisers that their purpose was “to help people enjoy their retirement with the security of an income for life.”

The company estimates that in 15 years’ time, the number of people in New Zealand aged over 65 will reach about 1.25 million. In July 2022, Stats NZ estimated there were about 842,000 people in that age bracket.

Lifetime already offers annuity-style income products. Founder and managing director Ralph Stewart told TMM that workshops around the country had shown both those with reverse mortgages and those without didn't like the uncertainty of not knowing how much equity they'd be able to retain.

Stewart doesn't see his company as directly competing with traditional reverse-mortgage offerings, which he said are probably a better option for those seeking a lump sum. Lifetime's option, he says, is more suitable for those seeking income.

He says his company's product has had a long gestation period and is modelled on the Australian Homesafe company's wealth release product.

The onboarding process for a customer may take up to six months, and the customer will have to obtain independent legal advice, as with reverse mortgages, as well as ensuring family members are aware of what's happening, Stewart says.

What’s in it for advisers

The specialist nature of the new debt-free product means there's little work for mortgage advisers in the process; the same is true with reverse mortgages, although all three companies will pay advisers a referral fee: $1,250 from Lifetime, $1,200 from Heartland and $1,000 from SBS.

Lifetime had been planning to pay a lower $500 referral fee, but Stewart says when they turned up to the TMM conference, they learned Heartland had raised its fee so Lifetime chose to match it.

Heartland's retail and reverse mortgages general manager, Keira Billott, says the change in referral fee had nothing to do with Lifetime's advent.

“It was changed last year because it had been a while since we last reviewed it,” Billott says, adding that referrals from brokers currently make only a small contribution to selling reverse mortgages.

One reason for “enhancing the broker proposition” has been the opportunity to educate advisers and to raise their awareness and understanding of the product, she says.

Heartland has made no other changes to its reverse mortgages since it became aware of Lifetime's plans, Billott says, describing the latter as “something we've heard about and acknowledged, but it's not something we've reacted to in any way.”

While both Heartland and SBS Bank allow their reverse-mortgage customers to ringfence a portion of their equity, that amount will be excluded from calculating the maximum amount they can borrow.

Lifetime Founder and managing director Ralph Stewart

SBS managing director Mark McLean

Demand growing

Heartland's numbers demonstrate that there's significant and growing demand for its reverse-mortgage product.

Its New Zealand portfolio grew 18.7% to $972 million between June and December last year, and has been growing at a compounded annual rate of 16.7% since July 2018.

Meanwhile SBS managing director Mark McLean said his bank's product is growing at just under 10% a year currently, compared with total credit system growth of 3.5% to 4% a year.

However, SBS's mainstream mortgage portfolio is growing faster at about 13% and reverse mortgages total about $90 million out of total residential property lending of $4.2 billion at Sept 30 last year.

There's no doubt that the current high-interest-rate environment means the amount of equity of reverse-mortgage holders is being eroded significantly faster than at any time since the global financial crisis.

Reverse mortgage products only work with floating rates – given their indeterminate longevity, it makes no sense for the vendors to offer fixed rates – and floating rates offered by the major banks averaged just below 6% between 2008 and 2020, until the onset of the covid pandemic when they sank below 5%.

However, Heartland's rate now is 9.98%, while SBS's is 9.95% - significantly above the floating rates of the big four banks, which range from 8.64% to 8.74%.

How much can you borrow

The amount people can borrow on reverse mortgages is strictly limited according to age and the valuation of their home.

Heartland, for example, will lend only up to 20% of the value of the home of a 60-year old, but will lend up to 40% on the home of an 80-year old.

SBS's limits are lower – it allows an 80-year old to borrow up to a maximum of 30% of the value of their home.

At December 31, Heartland's average loan-to-valuation ratio (LVR) at origination was just 9.6% but the current average LVR was 22.8%.

The average loan size was $135,139 and the weighted average age of borrowers was 78.

Borrowers can repay reverse mortgages at any time, and Heartland's repayments of $58 million in the six months ended December were up $7 million on the previous first half.

That was far outweighed by new originations of $96 million, although that was down $13 million on the previous first half.

The main reason Heartland's borrowers have given for using a reverse mortgage is to make alterations to their homes, making them more aged-friendly, while some of those still repaying a mortgage have swapped to Heartland's product so they don't have to continue making payments.

Big banks not going there

While ASB and Westpac have dabbled in reverse mortgages in the past, none of the four major banks nor Kiwibank now offers them - and much the same has happened in Australia, where the major banks have abandoned the field and Heartland is now the clear market leader.

Best guesses as to why the major banks have bowed out include the fact that reverse mortgages are much more complicated than ordinary mortgages.

The majors have followed the path of least resistance, offering only the traditional product and avoiding the risk of reputational risk: the potential negative headlines, possibly from adult children learning their expected inheritance is either much smaller or has vanished altogether, are all too easy to imagine.

The major banks' increasing reliance on mortgage advisers, who now write well over 50% of the major banks' traditional mortgages, also shows the banks' decreasing appetite for the hard work of originating mortgages, let alone the much more complicated and time-consuming task of writing reverse mortgages.

SBS’s McLean says that perhaps the limited size of the opportunity, especially compared with other segments of the market, makes reverse mortgages less attractive to his major competitors.

“It takes more time. You're meeting face-to-face or via conferencing with borrowers to make sure it's fully explained and to ensure they get independent legal advice,” he says.

“We encourage them to speak to their family so there are no surprises. I think it's a very good product to have in the market for people who want to maintain their lifestyle.”

But it isn't for everyone.

“When they work through it, some people will decide no,” McLean says.

Heartland's Billott says her bank's aim is to “ensure the customer is in the best situation possible” and that it has “a really robust application and onboarding process to make sure they're fully informed.”

Her bank has more than 23,600 customers in New Zealand and she says people will now have “a big opportunity” with Lifetime's product “bringing something else to the picture.”

But it also highlights the limits of what the Government is offering older people.

Billott suggests there needs to be “much bigger conversation about how New Zealand can support retirees.”

This story first appeared in the TMM Magazine. If you've enjoyed it and want to get your own copy of the magazine click here and fill in your details.

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