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Unlock equity. Understand the cost.
Reverse mortgages can provide financial flexibility in retirement, but compound interest means your debt grows faster than you might expect.
How reverse mortgages work.
The Basic Principle
You borrow against your home equity and receive the funds as a lump sum, regular payments, or a combination. No repayments are required while you live in the home. Interest accrues and compounds, increasing the debt over time.
Age-based Borrowing Limits
At age 60, you can usually borrow around 15-20% of your home's value. This percentage increases as you age, reaching around 40-50% at age 90.
No Regular Repayments
You can choose to make no repayments while you live in your home. Some borrowers opt to pay interest to prevent the debt growing, but this is optional.
Compounding Interest
If you make no repayments, interest is added to your loan balance each month. You then pay interest on that interest, causing the debt to grow exponentially.
Lifetime Occupancy Guarantee
You retain the right to live in your home for as long as you choose. The lender cannot force you to sell while you are alive and living in the property.
The Real Cost of Compound Interest
Because you pay interest on interest, the debt can grow much faster than many people expect.
A Practical Example
If you borrow $50,000 at 9.5% interest with no repayments, your debt will approximately double every 7-8 years. After 15 years, that $50,000 debt becomes roughly $195,000. After 20 years, it exceeds $310,000.
$100,000 Loan at 9.5% Interest
Projections with no repayments
| Years | Debt Balance | Interest Paid |
|---|---|---|
| Start | $100,000 | $0 |
| 5 years | $157,000 | $57,000 |
| 10 years | $247,000 | $147,000 |
| 15 years | $389,000 | $289,000 |
| 20 years | $613,000 | $513,000 |
Figures are illustrative only, based on 9.5% interest compounding monthly with no repayments.
Impact on your estate.
Reducing Inheritance
The growing debt reduces the net value of your estate. If property values do not rise faster than your debt, there may be significantly less for your beneficiaries.
Family Discussions
We strongly recommend discussing your plans with family members before committing. Some families prefer to help directly rather than see equity consumed by interest.
No Negative Equity Guarantee
Most NZ reverse mortgages guarantee you'll never owe more than your home's worth. But this doesn't prevent your equity from being significantly eroded.
Alternatives to consider.
Downsizing
Selling your current home and buying something smaller releases equity immediately, without ongoing interest costs. May also reduce rates, maintenance, and insurance.
Rates Rebates & Postponement
Councils offer rates rebates for eligible homeowners on low incomes. Some also allow rates postponement at much lower interest rates than a reverse mortgage.
Family Arrangements
Some families arrange loans or gifts to support older members, which can be more cost-effective than a commercial reverse mortgage. Should be properly documented.
Renting Out a Room
If you have spare capacity, renting a room can provide regular income. This is increasingly common and can help cover ongoing costs.
Government Assistance
Ensure you are receiving all entitled support: NZ Super, accommodation supplements, and community services cards.
Independent advice is essential. Before choosing any option, speak with a qualified financial adviser who can assess your complete situation.
When a reverse mortgage may be appropriate.
Take Your Time
A reverse mortgage is a significant financial decision that will affect you for the rest of your life. No legitimate provider will pressure you to sign quickly. If you feel rushed, step back and take time to consider your options carefully.
Key Takeaways
At current interest rates, a reverse mortgage debt can double approximately every 7-8 years.
The loan is repaid when you sell, move into care, or pass away - this directly reduces what remains for your beneficiaries.
Alternatives like downsizing, rates postponement, or family arrangements may be more cost-effective.
Independent legal advice is required, and we ensure you fully understand the terms before committing.
Related Guide
Understand your options for property and living arrangements in retirement.
Read the Retirement Villages GuideRelated Reading
Understanding Occupation Right Agreements
An ORA is not a property purchase. Before you sign, understand what you are actually buying, what you are giving up, and the financial implications.
When Family Helps with the Deposit
Bank of Mum and Dad? We explain gift vs loan structures, property sharing agreements, and protecting family contributions.