ASB becomes first big bank to offer reverse equity mortgages to asset rich but cash poor retirees

ASB becomes first big bank to offer reverse equity mortgages to asset rich but cash poor retirees
Interest.co.nz calculations show that a borrower with NZ$500,000 of equity who borrows NZ$20,000 a year at 7.75% would have run down that equity to zero after 15 years.

ASB has announced it will be the first major New Zealand bank to offer asset rich but cash poor customers reverse equity mortgages.

(Updated with background on other offerors and their rates; Auckland District Law Society warning)

Reverse equity mortgages have proved controversial in the past, particularly among borrowers concerned about putting debt back into houses they had hoped to hand on to their heirs unencumbered.

However, many have predicted reverse equity mortgages will become more popular as an ageing population sitting on big equity gains from the property boom seek to free up cash to pay for medical bills, holidays and living expenses in extended retirements.

Despite that, some borrowers have worried that lengthening retirements and survivability allied to the power of compounding interest could see equity eroded before any inheritance can be passed on. Falling house prices also increase the risks around reverse equity mortgages, given any equity in a house is being squeezed from both ends.

Other providers of reverse mortgages include SBS Bank and Sentinel. Westpac to used offer such mortgages, but pulled out of the market in August 2008.

ASB said the time was right for a major bank to offer reverse mortgages, which previously have only been offered by specialist lenders at relatively high interest rates.

"These loans are specifically suited to people older than 65 years of age, and enable asset rich but cash poor home owners to borrow money against part of the equity they have in their home," ASB said.

"While borrowers can repay all or part of the loan at anytime, normally the loan and outstanding interest is recovered by the bank when the home owner sells the property, or from their estate," it said.

“We are introducing HomePlus in response to demand from our senior customers,” said ASB's CEO of Customers, Markets and Products, Catherine McGrath.

“In Australia home equity release loans are becoming more common, but until now have been offered in New Zealand by mainly specialist lenders," she said.

ASB said its reverse mortgages would comply with the voluntary code of practice developed by the Office of Senior Citizens.

"We will also set new ethical standards, particularly around ensuring borrowers fully understand the arrangement into which they are entering, providing guarantees around lifetime occupancy and promising people never have to repay more than the value of their property," McGrath said.

“The 90 day cooling off period also ensures borrowers who change their minds can repay their HomePlus loan," she said.

“This type of borrowing is not for all senior customers, and we recommend it only for those customers who have no other means of accessing cash. Releasing funds from other assets if available will invariably be a better option than taking out a home equity release loan. However, for those who do not have other options, it can allow them to maintain an independent lifestyle, stay in their own home longer, or undertake necessary repairs that are otherwise beyond their financial means."

Borrowers would have to go through a three meeting process to ensure the loan was right for them, ASB said, adding the borrower would have to seek independent legal advice and understand how the debt would increase over time.

"We also strongly recommend that family and other advisers are fully informed of their intentions," ASB said.

ASB said the interest rate for HomePlus would be variable but start at 7.75%, whicn included the cost of funding the loans, the risk factor, the guarantees provided and the length of time the money would be tied up.

ASB's regular variable rate is currently 6.25%. See all bank mortgage rates here.

Sentinel is offering 7.3% for its reverse equity loan, while SBS' Advance Equity release is currently 7.1%.

“ASB’s entry into the home equity release market will see this product come of age in New Zealand," it said.

The Auckland District Law Society issued a warning paper about Reserve Equity Mortgages in December 2007.

"Unless the borrower is over 70 years of age and intending to borrow only a small proportion of their equity, they should be very circumspect about entering into such a mortgage," it warned in the paper, available here.

University of Melbourne researchers issued a paper in mid 2007 on reverse mortgages in Australia, where the market is more developed.

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PC says - "The greatest business in the world!"

You've nailed it there PC.  

What's the betting that the Gov't will step in at some stage to ensure that the banks never get into negative equity with this product?  It must be great to have a business whereby you can't lose no matter how badly you run it!

 Great ! .... so we are all at the mercy of the banks from day one to eternity.

Can someone in that fine industry of banking, here in NZ, tell me what effects has this recession, so far had on your business in the last 3 years. As you all seem to be still making a reasonable profit,  apart from a little tax hiccup with the IRD.

Personally, I have stayed out of the banking game, purchased a property in 1993 (at a fair value) and quickly paid it off.

However, I feel for all those people out there who are just slaves, with mortgages to these ruthless organisations,

Does everyone realise that in Latin , mortgage means "deathgrip" (mort - death, gage -grip) ......says it all to me

What's your point Anonymous ?

That time is all dead and buried ........ with minimal paid interest to the banks.

That is my point, money for other things in life, rather than being hamstrung by inflated mortgage repayments...... death grip remember....

You just don't get it Sam. Life is easier if the government tells us exactly what we can and can't do. Just imagine being able to retire your brain completely - that's the ultimate utopia. Or at least some here seem to believe so.

Steve Orig............your suggestion is that your financial situation does not dictate.....

 

No shortage of Mom n Pop losing their shirts to finance companies leaving them with the equity in their home......

Nobody got their arm up their back but when your desperate you do desperate things.

 

ASB will call this a market driven service that needs to be filled.

 

I'd call it what it is .............circling buzzards looking to capitalise on dead meat.

 

Bankey Boy Bankey Boy...........one day....oh glorious day.........your gonna get yours.

The worry I have is that the banks have such an awful track record when it comes to doing what is right by people. I suspect they have approached this with one thought in mind..."how can we profit from this sector of the population"....they sure as hell have not been thinking.."how can we help this sector".

The other worry is that a bastard govt in the future will judge the loan as income and chop away the pension rights.....and that WINZ staff will take the attitude.."you don't need the living alone allowance...you just had an overseas holiday"

Yup...and the bigger the profit the greater the service...right anon!

Keep that day job going anon...I want you paying taxes so I can collect that pension.

One way to leave your children nothing.

The miracle of compounding interest. The quote below is from the Office of Senior Citizens:

"An Example
Mr and Mrs Smith, aged 73 and 69 respectively, live mortgage free in their home in One Tree Hill. Their home is valued at $400,000 and, while old, is likely to maintain its value in the foreseeable future. They have a car and $22,000 in the bank which they regard as their emergency fund and the means to meet their funeral costs. This leaves very little to supplement their New Zealand Superannuation, improve their standard of living and maintain the home.
Priorities for Mr and Mrs Smith are to ensure their home is repainted every 10 years, essential repairs are carried out when required, that they can replace their car when required, that they are able to maintain their health and can periodically visit their daughter and grandchildren in Australia.
They apply to a HER scheme provider for a loan of $45,000 to replace their car, paint the house and visit their family. Mr Smith will also have non-urgent surgery on his knee done privately.
The money is made available to them and the amount of the loan, and compounding interest of 10.5% on the loan, secured over the home to be paid when the home is sold.
Mr and Mrs Smith anticipate they will remain in the home for 20 years by which time the amount to be paid back will have increased to $356,000. However, the value of the house, based on an average annual increase in value of 3%, will be expected to have a value in 20 years of about $722,000. At that time Mr and Mrs Smith will still have equity in their home of $366,000."

See...the banks are just local friends out to help you in your old age...and now you know why the aussies long ago said banks are bastards.

You get it printed on the shirts ........I'll do my bit to distribute.

Matter o fact in my next little sit down with my friendly.......... I'd like to wear one......yes yes I would. 

Just another step in stealing the wealth of a gen or two........

Politically Key would be on board with this as good business.........Banky Boy  pics through the dead meat for possibilities while the dead meat keeps piling up.

Oh yeah John .....we're gonna be a Financial hub of the South Pacific........ and f#%k me ....he meant it.

This smells a bit funny to me....

it's all good until Nana's house goes into negativity equity versus the amount "given/borrowed/lent" and then the banks come knocking for a restructuring...just like they're gonna do for all those residential mortgaged homes that are going 'underwater"  daily around nz in neg.equity .

the only good thing in the ASB prop.above  is the 90 day cooling off period to give the kids time to strap her to an electric fence and blast some sense into her!!

I don't know why more don't consider an alternative along the lines of this scenario:

Elderly parents want/need $40k for trip/operation or whatever, think about a reverse equity mortgage, kids get all up in arms about their "inheritance" getting eaten away by interest costs on said reverse equity mortgage.......so, kids should take out a $40k mortgage on their OWN home and give the $40k to their parents as the kids have the ability to repay it a hell of a lot quicker and at a lower interest rate, thus preserving all the equity in the parents home and protecting their inheritance. 

Oh, hang on, the kids have negative equity.  Or are stretched to the limits financially with what they've already borrowed even if they don't have negative equity.  But aside from that, if the kids can afford it, isn't it a better/cheaper way of getting $ to the parents while protecting the kids inheritance?

Your Grandpappy's reiteration does not make it so................

If that's your credo fine....to each his own.........

I will help mine as and when I can......eyes wide.

Fair enough, but a lot of parents WANT to leave an inheritance for their kids, irrespective of what the kids want. 

That is true for most of us I think VeeDub....can't take it with me....don't want to neither.

Better them than than the t.....................axman.

I agree, and so do most people in my generation (I'm 25). I expect my parents to sell their assets to fund their retirement, and do their best to time it so they have as little left as possible come the end. Most of my friends feel this way - it's easier than ever to make your own way in the world, we don't need our parents to be austere for our sake.

"my grandfather always said you gotta make your own way" - How exactly would an inheritance prevent you from making your own way? Given today's life expectancy, people are not likely to receive an inheritance until they're close to retirement themselves anyway... and one would hope that they'd tried and done something of their life before then!

As Veedub says below, "a lot of parents WANT to leave an inheritance for their kids". Ours are preschoolers and we've saving on their behalf. I don't see it as a bad thing sorry. It means that we'll be able to help them out, be it to contribute to the purchase of their first home or otherwise (and they won't have to worry about student loans). Needless to say, we're not planning to wait until our deaths to pass this on to them.

That would certainly be a cheaper option!

A better option for nana would be to sell the bloody property and move to a nice warm place like the Cook islands where the interest on the loot will be enough to keep nana more than happy in rent and grub and grog...and she gets all the coconuts she can eat. When she sails away the capital will remain for the family to fight over..if she hasn't blown it on rum punch. Go Nana!

Anyone contemplating this should research the results in the UK. It's not pretty for some.

Dear, Peamuttbutter, Fairfax Orouke, Kin, rj, steven-orig

And anyone else

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cheers

Bernard

Just go register!  It takes about 30 seconds, is free and you DONT get spammed.  I just received 1 email with my account details, which is fair enough. 

And although I'm not personally particularly entertaining, I'm very proud of the fact that I'm the only contributor on here so far to have got Bernard to do a "90 at 9" video wearing a pair of fish-net stockings.

:)

Bernard : Any other benefits , we need a new set of Ginsu Steak Knives ............... buggered the last lot cutting up rubber boots like they showed in the adverts ............ ?

It was just an example from the Office of Senior Citizens.  Link here

Hey nonny....... I figured out a neat  sign on name for you..................

Are you ready...........................

THE MAN'S FRONT................................hey huh u like...?

Hey there Mr Man........where u been....? now you are a must sign ....in the interests of balance and continuity................

So come ...be as your name sake suggests and sign up......you know you want to....!

And we want you to too............ but keep that on the down low....

And don't forget ...............CASH IS KING...........and don't sleep alone.

Bernard : You tackled this topic with Jim Mora on Radio National , prior to 4 pm today . Clearly you did not hear his last question to you , which was , are there different ways of structuring the reverse mortgage , than that proposed by the ASB . Embarassingly , you flaffed on about the iniquities of the deal .............. missing his question , entirely ! And a superb question he asked of you ............... Oooooooops !

And there are ! Overseas  the reverse mortgage has  had   many years of successful implementation in both Europe & the USA . Indeed , one Jean Clemant of France diddled her lawyer , who drew up a reverse mortgage , providing her with an annuity and a guarantee of reisidency , until her death ............. He pre-deceased her . She lived on til age 122 years , becoming the oldest fully credited person to have ever lived !

The ASB spokesperson ('ZB : Larry Williams )   said that guarantee of residency was a principal part of the binding agreement ................. did you miss that ? Further , over '65'ers could limit the degree of draw-down to any % of the propertie's capital value , that they decreed ............... ummmmmmmmm ., did'ya pick up on that ?