Are reverse mortgages the answer to ageing well in place?

Heartland explores homeownership for older Kiwis

Are reverse mortgages the answer to ageing well in place?

As New Zealand's population ages, with one in five expected to be over 70 by 2066, the ability to "age in place" will become increasingly important. This means staying in your own home for as long as possible, maintaining independence and comfort.

New research, conducted with support from Heartland Bank, explored the challenges and opportunities faced by older adults who want to age in place.

The study shed light on both the difficulties and potential solutions for aging at home. It explored financial options like equity release through downsizing and reverse mortgages, which can help seniors stay in their homes while managing financial constraints.

Keira Billot (pictured above left), general manager retail at Heartland Bank in New Zealand, said that the bank is invested in understanding the needs of those entering and living out their years in retirement.

“The research presents the challenges we need to explore further to address the needs of a rapidly ageing population and the social and wellbeing issues facing us,” Billot said.

The rising economic challenge of ageing in place

Rising living costs and an aging population are threatening the ability of many New Zealanders to maintain their independence and quality of life in retirement.

Traditionally, owning a home in New Zealand has been associated with security and belonging, according to the study, conducted in collaboration with RMIT University and Heartland's Australian arm, Heartland Finance.

However, this dream is becoming increasingly out of reach for many.

Predictions suggest that only around half of those over 65 will be homeowners by retirement, compared to 82% in 2001.

This significant decline coincides with a 15% increase in the number of over-65s with mortgages since 2018, and a near 50% rise in total mortgage debt nationwide.

With fewer people owning their homes, the number of renters is rising. This, coupled with potentially insufficient retirement income, could create significant financial strain for older New Zealanders.

When do people start thinking about where they'll live after retirement?

Most people want to stay in their own homes for as long as possible (ageing in place). This decision is often made around retirement age. However, planning for later retirement living arrangements might not be fully considered earlier in life.

The research showed there are several options for post-retirement living:

  • Ageing in place: Staying in your current home
  • Downsizing: Moving to a smaller, more manageable home
  • Retirement villages: Communities offering independent living with some shared facilities and services
  • Residential aged care: Facilities providing full-time care and support

While the research showed that ageing in place is preferred, some life events can trigger a re-evaluation of living arrangements, such as retirement, health decline, loss of spouse, or moving closer to family.

Some people might delay or avoid making decisions about their living arrangements until facing a crisis, which can be stressful. Therefore, planning and exploring options early is recommended, even if the final decision comes later.

Releasing equity through downsizing

Downsizing is often seen as a way for older adults to make their homes easier to manage and potentially free up some money. It can involve moving to a smaller, more manageable home, which often leads to easier maintenance and lower costs.

However, the research found downsizing might not be as effective in freeing up equity as initially thought. Here's why:

  • Moving often involves upgrades: People, regardless of age, often move to improve the quality of their home, such as getting better fixtures, a more accessible design for aging (fewer stairs, larger bathrooms), or better access to amenities.
  • Moving costs can be significant: Legal, valuation, transfer and real estate fees can be significant and moving expenses can eat into any potential financial gains from selling.
  • Suitable housing might not be available: Finding the right smaller home in the desired location could be challenging.

While some people downsize for financial reasons (27%), many do it for lifestyle reasons (27%) like wanting less maintenance (18%) or due to external factors (15%). While that specific research accounts for Australians, the research suggested older New Zealanders downsize for similar reasons. 

Equity release through reverse mortgages

Home reversion schemes and reverse mortgages are not all the same, and in New Zealand the size of the commercial market is small.

The research found attitudes towards equity release products are mixed. Some see them as having real potential to alleviate financial stress, especially in later retirement when other resources like superannuation are dwindling or exhausted. Equity release can facilitate maintaining a desired level of lifestyle.

Many, however, view equity release with caution, even suspicion.

Concerns about equity release products include erosion of the estate for bequest purposes, as well as aversion to borrowing in later life. Decisions to access equity release are often made “unplanned” when circumstances such as a health or financial crisis force it.

Equity release is not widely considered as part of planning for late retirement.

There is, however, an increased use of advisers by ageing cohorts and a growing awareness and acceptance among advisers of these products, which may inform the degree of future demand for the various home equity products.

Sharon Yardley (pictured above right), general manager reverse mortgages at Heartland Finance in Australia, said reverse mortgages can be a good solution for overcoming the financial barriers to ageing in place.

“As leading providers, Heartland Finance and Heartland Bank are proud to provide a solution which can help Australians and New Zealanders remain in their home, and live a more comfortable retirement,” said Yardley.

Reverse mortgages a suitable source of income

While government and homecare services can go some way to facilitating a safer and more independent lifestyle, the research found by themselves, they are likely to be insufficient for a fully safe and comfortable life in the home.

“In the absence of additional savings and income, home equity can be released to facilitate income enhancement, debt consolidation, renovations, healthcare, in-home care, and lifestyle choices such as new cars and holidays that will contribute to an ageing household's wellbeing,” the report said.

Although it's declining, the New Zealand market is still characterised by high homeownership rates.

“… home equity release products may provide a suitable supplementary source of income for many households,” the research concluded.