Many New Zealanders arrive at retirement asset-rich but income-poor. They own a valuable home but have limited savings to fund their lifestyle. The question becomes: how can you access some of that home equity without selling your home?
This guide explores the options for unlocking home equity in retirement.
The Home Equity Challenge
New Zealand has high rates of home ownership among retirees, but many have not built substantial savings beyond their property. The house might be worth $800,000 or more, but the KiwiSaver balance is $200,000 and there are no other significant investments.
NZ Super provides a baseline income, but it may not be enough for the retirement lifestyle you imagined. Meanwhile, hundreds of thousands of dollars sit locked in your home, inaccessible without selling.
This mismatch between wealth and income is common. Several options exist for bridging the gap.
Option 1: Downsizing
The most straightforward approach is selling your current home and buying something cheaper, freeing up the difference as cash. A couple moving from an $800,000 home to a $500,000 apartment might release $250,000-270,000 after transaction costs.
Downsizing has advantages beyond equity release. A smaller home typically means lower rates, insurance, and maintenance costs. It may be better suited to aging, with single-level living and less garden to maintain.
The downsides include emotional attachment to your home, the stress of moving, and the reality that you end up in a different (probably smaller or less central) property. Some people downsize and regret it.
We cover downsizing in detail in our separate article on that topic.
Option 2: Reverse Mortgages
A reverse mortgage allows you to borrow against your home equity without making regular repayments. The loan (plus accumulated interest) is repaid when you sell the home, move into care, or pass away.
You can access funds as a lump sum, regular payments, or a combination. The amount available depends on your age and property value, typically starting at around 15-20% of home value at age 60 and increasing with age.
Reverse mortgages have several important features to understand.
Interest compounds over time. Because you make no repayments, the loan balance grows. A $100,000 loan at 8% doubles to $200,000 in about 9 years. Over a long retirement, the debt can consume a substantial portion of your equity.
Lifetime occupancy guarantees are standard. Reputable lenders guarantee you can stay in your home for life, regardless of how the loan balance compares to property value. You will never be forced out due to the loan.
No negative equity guarantees protect you (and your estate) from owing more than the home is worth. If the loan balance exceeds property value when the home is sold, the lender wears the loss.
Fees and interest rates are typically higher than standard mortgages. Expect rates 1-2% above standard mortgage rates plus establishment fees.
Reverse mortgages suit people who want to stay in their home, need additional income, and accept that less equity will remain for their estate. They are less suitable if leaving an inheritance is a priority or if you might want to move in the near future.
Option 3: Home Reversion
Home reversion is less common in New Zealand but works differently from reverse mortgages. You sell a portion of your home to a provider in exchange for a lump sum, while retaining the right to live there.
When the home is eventually sold, the proceeds are split according to ownership shares. If you sold 30% of your home, 30% of the sale proceeds go to the reversion provider.
Unlike reverse mortgages, there is no interest accumulating. But you are giving up a share of any future capital growth, which in a rising market can be significant.
Home reversion products have been limited in New Zealand, so availability may be constrained.
Option 4: Standard Borrowing
Some retirees can access home equity through conventional borrowing, particularly if they have other income sources or are recently retired.
Banks are cautious about lending to retirees with limited income. But if you have rental income, significant investment income, or a working spouse, you may qualify for a standard mortgage or top-up facility.
The advantage is lower interest rates and more flexibility than reverse mortgage products. The disadvantage is that you need to make regular repayments, which defeats the purpose if your problem is insufficient income.
Interest-only facilities can help, allowing you to access funds while minimising repayments. But these still require you to service the interest from somewhere.
Option 5: Renting Part of Your Home
If your home has space you do not need, renting out a room or separate unit generates income without borrowing or selling equity.
A granny flat, sleepout, or spare bedroom could generate $200-400 per week depending on location and quality. Over a year, that is $10,000-20,000 of additional income.
Boarding arrangements are simpler than tenancies from a legal perspective, but you lose some privacy and independence. The arrangement needs to work for your lifestyle.
This approach preserves your equity entirely while generating ongoing income. The trade-off is sharing your home with others.
Option 6: Family Arrangements
Some families arrange informal or formal loans using the parents' home equity. The family might help fund the parents' retirement in exchange for an agreed share of the eventual estate.
These arrangements can work well but require careful documentation and clear communication. What seems like a simple family understanding can become contentious if circumstances change or expectations differ.
Family arrangements should involve independent legal advice for all parties. Assumptions about inheritance and support should be made explicit.
Choosing the Right Option
The best approach depends on your specific circumstances.
If you are open to moving and want to release substantial equity, downsizing is usually the most efficient option financially.
If you want to stay in your home and need regular income or a lump sum, a reverse mortgage may be appropriate. Understand the long-term impact on your equity before proceeding.
If you have unused space and do not mind sharing, rental income preserves equity while generating cash flow.
If you have other income sources, conventional borrowing may offer better terms than specialist retirement products.
Questions to Ask Yourself
Before accessing home equity, consider several questions.
How much do you actually need? Drawing down more than necessary accelerates equity depletion. Be realistic about your income needs.
How long might you need the funds? A 65-year-old in good health might live another 25-30 years. The cumulative impact of interest on a reverse mortgage over that period is substantial.
What are your intentions for your estate? If leaving your home to your children is important, equity release reduces what you can leave. Have honest conversations with family about expectations.
Might you need aged care? Retirement village and aged care costs can be significant. Retaining some equity provides options if your care needs change.
What is your backup plan? If property values fall or circumstances change, what flexibility do you have?
Getting Advice
Home equity decisions in retirement are significant and often irreversible. Independent financial advice from someone qualified in retirement planning is valuable.
Look for an adviser who understands the range of options, not just one product type. Someone who only sells reverse mortgages will recommend reverse mortgages. Someone with a broader view can help you compare alternatives.
Legal advice is essential before signing any equity release agreement. The documents are complex, and understanding your rights and obligations requires professional review.
Your home is likely your most valuable asset. Decisions about how to use it in retirement deserve careful thought and professional guidance.
Need Help With Your Mortgage?
Our expert advisers are here to guide you through every step of your mortgage journey. Get in touch for a free, no-obligation consultation.
Talk to an Adviser
