What Are We Saving For? Using assets in retirement – Commercial Equity Release schemes

What Are We Saving For? Using assets in retirement

The most common type of wealth-holding by older people is home ownership. A mortgage-free home represents a lifetime of accumulated savings. How can this asset be used in the lifetime of the owners?

Commercial Equity Release schemes

Many older people want to remain in their homes, where they have brought up their families, where they feel part of the community and which they own mortgage-free. But they are finding it difficult to make ends meet – to enjoy a comfortable retirement – on their regular income from NZ Superannuation and whatever else they have from their savings and investments. In other words, they are “house-rich and income-poor”. These are the potential customer group for commercial equity release schemes.

There are two main types of equity release schemes, with numerous variations –

In Reverse Mortgages a loan is taken out against capital tied up in a house. No immediate repayments of capital or interest are required.  Interest accumulates on a compound basis and is added to the loan. Most schemes offer a “no negative equity guarantee”, which ensures that debt will never exceed the value of the property, even with the added interest. Some types of scheme have fixed terms, but, more usually, when the client dies or the property is sold, the full loan plus interest is repayable. Reverse mortgage schemes can provide lumps sums, regular income in the form of annuities, line-of–credit arrangements, or combinations of these. The line-of-credit option allows people to draw amounts of cash as and when needed (up to a set limit) and this reduces the amount of interest which is “rolled up.”

Home reversion or lease-back plans entail sale or part-sale of the house, but the resident is guaranteed occupancy rights for life. The sale price is lower than market value at the time as the buyer has to wait, perhaps for decades, before they can take the property over[1]. Home reversions have advantages over mortgage-based products, as no interest accumulates and this gives greater certainty for providers and consumers. Home reversions may also provide either an annuity or mixed annuity/lump sum payments, with variations according to how much of the equity is sold, whether rent is paid, and who is responsible for maintenance.

History of New Zealand Schemes

In 1990 the Housing Corporation of New Zealand worked with Age Concern on the feasibility of equity release. The overall response was positive.

The Corporation began a pilot scheme – Helping Hand Loans. The loans were payable only for housing related costs – repairs, maintenance, alterations, rates and insurance. The scheme was overtaken by changes in housing policy and was never extended.

From 1991 the Invincible Life Assurance Company in Wellington began to market

reverse annuity mortgages with different eligibility ages and sets of conditions. The

uptake of  both  schemes was slow, but the clients, according to research which I did at the time, were generally satisfied. However, the violent deaths of Gene and Eugene Thomas of Invincible Life in Wellington in 1994, which you might remember, must have been a setback for acceptance of the reverse annuity mortgage concept.

Nevertheless, other reverse mortgage schemes appeared in the 1990s and early 2000s, offered by banks, insurance and finance companies. At the time when I reviewed the situation for the Retirement Commission in 2005, Sentinel Lifetime Loans had the largest market share.             The Safe Home Equity Release Plans Association (SHERPA) was launched in 2005 as an umbrella body. Currently its web-site lists only three full members – Bluestone, Dorchester and Sentinel. None of these are actively marketing their plans, having been hit hard by the credit crunch. Other providers have fallen by the wayside and disappeared. There has been some recent interest by banks. By December 2008, nearly 7,000 borrowers had taken out equity release mortgages in New Zealand and $430 million had been paid out in loans. The average loan was $62,000.

Fourteen local authorities offer Rates Postponement Schemes, aimed predominantly at ratepayers 65 and older, who can postpone their rates indefinitely if they choose. The accrued rates and charges are then paid back from the person’s estate when they die.

Pros and Cons

The Retirement Commission, Age Concern, the Consumer Institute, and the Office for Senior Citizens all offer advice and warnings about commercial equity release schemes. These include advice not to use the schemes too soon, especially for everyday expenses, and to avoid schemes that involve investment in high-interest debentures or risky property developments. They are often seen as a “last resort” because the interest rates are high and compound fiercely and because they limit choices about moving in later life.

But it seems there is potential for safe, well-designed and innovative products in the equity release market to play a larger part in helping older people to release some of their capital to supplement their income in retirement, especially when they want to stay put. A lot depends on how acceptable this idea is to older people. They may not be keen to use up their equity if they are set on preserving it for their children’s inheritance.

So, next time, “leaving something for the kids.”

Dr Judith A. Davey

Age Concern New Zealand voluntary policy advisor

Senior Research Associate, Institute for Governance and Policy Studies, Victoria University of Wellington

 

 

[1] This type of arrangement, known as Rentes Viagere has been possible in France for 200 years. Jeanne Louise

Calment who lived to the age of 7002122000000000000122, and was probably the oldest person in the world when she died in

1997, had such a plan with her lawyer whom she outlived by several decades, getting good value from the