First published in Stuff, 19 September 2024

By Rob Stock

Inspired by the French ‘viager’ system, a new option for cash-poor, house-rich retirees is being marketed as an alternative to reverse mortgages.

Retirees who own their own homes but are short on cash to supplement their NZ Super income have few options.

They can take in lodgers. They can downsize to move into a smaller, cheaper place, freeing up some equity.

They can sell up, and spend most of their capital to buy an occupation right in a retirement village, getting back 70% to 75% of their capital when they leave.

And then there are reverse mortgages sold by the likes of Heartland Bank, which are deferred repayment loans that come with a floating borrowing rate, currently 10.5%.

But former life insurance and ACC chief executive Ralph Stewart has now done two deals using a new form of equity release for retired home-owners, inspired by the French system.

His company Lifetime Retirement Income (Lifetime) is offering to buy part of the equity in retirees homes through a scheme called Lifetime Home, while allowing them to continue living in their homes as long as they want.

It’s only available to people over the age of 70 with owner-occupied, mortgage-free, standalone homes, mostly in urban areas, and it comes at a price. And to date, Stewart says just two deals have been done; one in Auckland, and one in Christchurch.

The sellers were aged 71 and 86.

“It's an innovation to the extent that we've taken the French model, the viager, and applied it to income only,” Stewart says.

Viager is a term that can be translated as lifetime annuity, or ‘for a lifetime’.

Under viager deals, buyers pay an upfront discounted price for a retiree’s home, say 30% of the value, a payment known as a bouquet.

They then pay a monthly sum to the retiree they have bought the place from, and the seller retains the right to live in the home they have sold until the day they die.

There is an element of gamble to the deal for the French viager buyer.

The seller might die in a short space of time, which would be good for the buyer.

However, the seller might prove very long-lived, with the most famous case being a woman called Jeanne Calment who lived to 122 and outlived her viager buyer.

Stewart’s version does include the discounted price, but the gamble taken in the purchase is different.

Lifetime progressively buys 35% of the equity in a retiree’s home over 10 years, paying 25% of the total price of the home, though it claws some of that back through fees.

There’s an upfront fee of 0.2% of the purchase price ‒ $2000 on a $1 million home ‒ and an annual fee of 0.23% of the payments the seller gets each year.

That $1m home would see the seller get paid $227,000 over 10 years, effectively turning equity into money that can be spent.

At the end of the 10 years the seller would own 65% of the equity in their home, and would until the day they chose to leave it. Lifetime would own the other 35% of the equity.

So, if that $1m home was worth $1.5m when it was eventually sold, Lifetime’s 35% equity stake, for which it paid $250,000 less fees, is worth not the starting $350,000, but $525,000.

However, if the seller lived another 10 or 20 years, Lifetime would have to wait to get its money out through a sale of the home.

Should a Kiwi Jeanne Calment emerge, Stewart himself might not see the home sold during his own lifetime.

While retirement villages and downsizing may be alternative options for cash-poor, house-rich retirees needing more income, Stewart says it is reverse mortgages his scheme is really aimed at competing with.

So when Lifetime is selling its scheme, it does so using comparison scenarios with reverse mortgages.

A reverse mortgage is exactly what it sounds like. Homeowners borrow money from a financier, like Heartland Bank. Interest on the loan compounds over time, and the loan is finally repaid when the homeowner leaves their home. The compounding effect means it is an expensive option, especially if the loan is left in place for a long time.

Heartland Bank charges a flowing interest rate, which is currently 10.5%.

Over longer periods, Stewart says his scheme is “inherently less profitable” than Heartland’s because of the reverse mortgage compounding effect.

Assuming a 10% average variable interest rate and annual house price growth of 3%, after 15 years, Stewart’s modelling indicates his scheme leaves sellers owning a greater share of equity in their own home than a reverse mortgage.

Over 10 years, it’s a line-ball game, according to Lifetime’s modelling.

Stewart acknowledges his examples do not catch all the possible permutations of an uncertain future, but provide “simple illustrations that are practical in supporting general understanding of the concepts – time, interest rates and equity sold”.

He says Lifetime encourages every potential customer to get legal and financial advice before making a decision, and talks to their families.

But he says some retirees really do not want to take on debt again, and are attracted to the idea of selling equity in their homes, rather than borrowing.

“We’re not a debt model,” he says.

Part of the sell is the “certainty” of sellers knowing where they will be after 10 and 15 years, he says.