Alice was enjoying her retirement. She owned her own property in Waikanae. It was one storey and she kept it very tidy.

Unfortunately her age was catching up with her and she was starting to having some trouble with the gardening, was struggling with the walk to her local shop, and could no longer drive. 

Even the few steps up to the door caused her some concern and it looked like the roof would need to be replaced soon as it was quite old.

Alice knew she would need some help soon and that she would need to replace the stairs with a ramp and have the roof replaced.

Although she had a mortgage-free house, she had limited funds in her bank account, and would not be able to pay for the work to be done to the property and for ongoing assistance each week.

There are a few options available to Alice.

Retirement village

One of the most common options that comes to people’s minds for someone in Alice’s position is selling her home and buying into a retirement village.

The “ownership” of an apartment or unit in a retirement village is very different to owning your own home.

The retirement village will grant a purchaser of an apartment or unit what is called an ‘Occupation Licence’. The Occupation Licence amounts to permission from the retirement village for the person to live in the apartment and use the common areas of the village for the individual’s lifetime, or until such time as the individual chooses to move (there are some exceptions to this).

The Occupation Licence does not mean that the individual owns the structure of the apartment or unit or has an interest in the land on which it is built. It is only a right to live there.

The nature of the Occupation Licence means that an individual cannot borrow against the value of the property, cannot sell their right to occupy to someone else, cannot leave their right to occupy to someone else on their death, and there are usually restrictions on people staying in the apartment and how long residents can have people stay.

If you buy into such a village, it is important to be aware that you will not benefit if the apartment’s value has increased when the apartment is sold.

You will usually only be paid back what you initially paid to get the right to occupy the apartment, less a ‘Deferred Maintenance/Management fee’, less any other amounts you owe the village (which can include costs to remove any additions made to the apartment for you).

If you are looking at buying into such a village, you should ensure you have sufficient funds to live in the retirement village as you will be responsible for paying the village’s weekly fee, utilities, and for any services you receive from the village such as meals, care, or housekeeping assistance.

Retirement villages can be a great option for individuals needing care that they cannot receive at home. It also provides residents with opportunities for social connection and community.

However, retirement villages are not for everyone and some factors that put people off entering a retirement village are their own preferred living arrangements, the ongoing living costs, family arrangements, and wanting to leave the family home to their children (or trying to leave a large inheritance to support their family).

Taking out a reverse mortgage

If you are over 65 and own a home but do not have sufficient funds to cover your day-to-day expenses or the maintenance of the property, another option is for you to enter into a reverse mortgage (also known as a ‘home equity release mortgage’).

In a reverse mortgage the bank/lending institution will lend you money and register a mortgage over your home.

There is no obligation on you to make payments on the mortgage loan while you are living in your home.

Interest on the loan will compound over time and the loan will be repaid either when the house is sold, after you stop living in the home, or after you have passed away.

The pros of a reverse mortgage are:

• You can remain in your own home for longer (if lack of cash was the reason you were going to have to sell);
• Provides cash that would otherwise be ‘stuck’ in the house until it sells;
• Usually the bank promises that you can live in your property for as long as you choose to;
• It’s one of the only ways to ‘borrow’ money in retirement as a bank won’t grant a normal mortgage or loan without an individual having an income;
• Usually the banks will provide a ‘no negative equity’ promise, which means an individual can never owe more than the equity in their house (i.e. the individual will never have to pay anything more than the sale proceeds); and
• Most banks allow early repayment of the loan (there may be some fees associated with this);

The cons of a reverse mortgage are:

• Higher interest rates, typically significantly higher than standard mortgage rates;
• Higher fees;
• The loan will eat into the inheritance of your children or other beneficiaries in your Will;
• You will receive significantly less money once the house is sold; and
• If you live a long time, and then have to sell your house, or are forced to move out for health reasons, you may be left with very little to live on if all equity has been used up by the loan and interest.

Other options

Reverse mortgages or going into a retirement village are not the only options. You can also:

• Downsize and buy a smaller house to release some of the equity;
• Sell all or a part interest in your house to a family member (subject to a life-interest to you);
• See if a family member is in a position to lend you money, with the loan being repayable on you selling the house or upon your death; or
• Move into a rest home (where you pay a weekly fee but do not pay any upfront costs to purchase an occupation right).

Individuals must always take legal advice before they decide to enter any of the above arrangements as any decision will have important implications for the future.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.