2 August 2016
More Kiwi's need to tap into their house's equity to fund retirement
More Kiwis need to tap into their house's equity to fund retirement
There is a common saying in retirement planning: You can't eat your house.
Lots of people think about the house they are living in as an investment.
But financial advisers generally say it's not. While paying off a mortgage and having a freehold house by the time you are 65 means a much more comfortable retirement, just the fact of owning an expensive house does not mean you automatically have a better lifestyle.
The equity is locked in the property, so even if it is increasing in value by 20 per cent a year, you cannot use that to pay the bills, cover your supermarket shopping or deal with your medical expenses.
But there are ways to put your house's equity to work for you, if you fear you might be asset-rich and cash-poor in retirement.
Reverse Equity Mortgages
Reverse equity mortgages, or equity release products, are becoming increasingly popular as people near retirement with houses that have shot up in value over recent years.
These are loans that are secured against a property. You usually do not make any repayments until the house is sold, which means compounding interest works against you as what you owe keeps growing.
A loan of $50,000 could turn into a debt of $150,000 after 15 years. That's not a problem if house prices keep rising but could be an issue if they stagnate or fall.
The interest rates charged are higher than standard mortgage floating rates.
Providers of reverse mortgages usually limit the amount that can be borrowed to a percentage of the house's value. None will take back more than the house is worth when it is sold and there are options to ringfence portions of equity if you want to ensure there is something left to pass on to your kids.
Commission for Financial Capability group manager of investor education David Boyle said reverse mortgages would not suit everyone but could work in some situations.
"Particularly if it is a very expensive home and they don't want to change or downsize it, that is something that is genuinely an option."
He said people could choose to take the loan as a line of credit or ongoing stream of smaller sums rather than a big chunk.
"That way you're only paying interest on what you draw down. But I would stress strongly that people should get personalised advice."
Many people plan to get the equity out of their properties by moving to something smaller and cheaper once their kids leave home.
Boyle said that was an option but a lot of retirees found they did not end up with as much cash left over as they hoped, once they found something in good condition near the amenities they wanted.
"Some choose to go into a retirement village because they know what their fixed costs are," he said.
Other retirees, particularly in Auckland, are opting to move out of the city to cheaper parts of the country where their money will go further.
Ralph Stewart, of Lifetime Retirement Income, said downsizing was a practical move in a lot of cases.
"If you have a three-bedroom, $800,000 house in Panmure it's probably a premium price and probably large. Only about 28 per cent of people have enough accumulated capital over and above NZ Super to not have to worry about money in retirement. So selling the family home and buying something smaller is a reality for a lot of people."
He said once people had freed up some capital, they needed to be careful not to run it down too fast. Low interest rates mean money does not last as long.
"If you can downsize and realise $200,000 or $300,000 and draw down 3 per cent to 4 per cent per year, plus Super, that might do it to get you to 90," he said.
Lifetime Retirement Income offers an investment product that guarantees to pay out 5.5 per cent of any invested amount for the rest of someone's life, if they invest at 70. They can get a higher income if they invest later in life.
If you are not particularly committed to the idea of being a homeowner, you could sell and become a tenant.
You will probably be able to afford to rent in a nicer area than you could buy in. If you sell your house for $1 million and invest that money, you could turn it into an income of $50,000 a year for 30 years.
This would cover the cost of renting, and you would get the pension on top.
Boyle said the main problem with this idea was that there was little security for tenants. Many people would not relish the idea of moving frequently in their old age.
PUT YOUR HOUSE TO WORK
Boyle said he had spoken to retirees who were putting unused parts of their house to good use. In one case, a woman who owned a big property on Auckland's North Shore had segmented part off and was renting it out to travellers via Airbnb.
He said many people might find parts of their house could be used to create some additional income. You could also take in a boarder or international student, rent out a granny flat to a tenant, or offer a part of the house with external access to a small business.
GET FAMILY TO BUY IN
If your children are not yet property owners, you could set up a system where they start buying shares of the family home.
Boyle said that would give them exposure to the property market - and the owners of the house some ongoing income.
He said it was no longer a given that parents would pass anything to their kids when they died, so this was a way of securing the family home for the next generation.
If you are brave and have deep pockets, you could carve off a piece of your section for subdivision.
The cost of this varies a lot but it is a significant investment, so it is important to check that there is demand for bare land in your area before you start.
Charges involved include council processing fees and development contributions, which make up the majority of the subdivision cost. Get expert advice.
This article was written by Susan Edmunds and published on stuff.co.nz