A reverse mortgage at 8.25 percent doubles in roughly eight and a half years. Nobody pays anything, nothing seems to happen, and then the family opens a statement at year nine and the $100,000 Dad borrowed is $200,000.
There is no trick to it. The arithmetic is simply unfamiliar because every other loan you have had went the other way.
Interest On Interest, Month After Month
Each month, the lender calculates interest on the current balance and adds it to the loan. The following month, interest is calculated on that new balance, which now includes last month’s interest.
At 8.25 percent a year, the monthly rate is about 0.69 percent. On $100,000 the first month’s interest is $688. By month twelve the balance is around $108,600 and that month’s interest is $747. The interest grows every month because the balance it is calculated on grows every month.
Over short periods the effect is mild. Over fifteen years it dominates everything.
$100,000 At Today’s Rate Over 5, 10, 15 And 20 Years
Nothing drawn after settlement, nothing repaid, rate unchanged at 8.25 percent:
| Years | Balance | Interest added so far |
|---|---|---|
| 1 | $108,600 | $8,600 |
| 5 | $150,800 | $50,800 |
| 10 | $227,500 | $127,500 |
| 15 | $343,100 | $243,100 |
| 20 | $517,500 | $417,500 |
The rate will not stay at 8.25 percent for twenty years. It has been as high as 9.4 percent at SBS in 2024 and as low as the high sixes in the years before. A projection at a higher rate as well as the current one is the honest way to look at it, and it is what I give clients.
Why Drawing Down Slowly Costs Less
Interest is charged only on money that has been advanced. Money sitting undrawn in a reserve costs nothing.
Take $100,000 used over five years, two ways:
Lump sum at settlement. $100,000 drawn on day one. Balance after ten years: about $227,500.
$20,000 a year for five years from a reserve. The first $20,000 compounds for ten years, the last for only six. Balance after ten years: about $187,000.
Same money, roughly $40,000 less debt, for the cost of a little patience. Heartland’s Flexi Reserve draws are free; the monthly advance option carries a one-off $120 fee. Both are far cheaper than taking the lump sum and parking it in a savings account earning 4 percent while paying 8.25.
What Happens If House Prices Stall
A reverse mortgage works comfortably when the house grows faster than the loan. It becomes uncomfortable when it does not.
$150,000 borrowed against a $900,000 home at 70, with the loan running to 85:
| Scenario | House at 85 | Loan at 85 | Equity left | Loan as share of home |
|---|---|---|---|---|
| House grows 4% a year | $1,620,000 | $515,000 | $1,105,000 | 32% |
| House grows 2% a year | $1,211,000 | $515,000 | $696,000 | 43% |
| House does not grow | $900,000 | $515,000 | $385,000 | 57% |
In the flat scenario the loan has passed the 50 percent lending cap, which means no further advances would be approved, and the family’s share has fallen from 83 percent to 43 percent. The no negative equity guarantee protects against the balance exceeding the sale price, but it does nothing for the equity in between.
Auckland house prices have grown at roughly 5 to 6 percent a year on average over the past three decades, with long flat periods inside that average, including most of 2022 to 2025. Assume less than the long-run average, not more.
The Equity You Keep: Three Scenarios
Three couples, each 72, each in a $950,000 home, each staying twelve years:
Modest and slow. $40,000 at settlement, $5,000 a year from a reserve. Loan at 84: about $190,000. Equity at 3 percent growth: about $1,165,000. Share of home consumed: 14 percent.
The full job. $120,000 at settlement for a major renovation. Loan at 84: about $325,000. Equity: about $1,030,000. Share consumed: 24 percent.
The maximum. The full 32 percent limit, $304,000, drawn at settlement. Loan at 84: about $825,000. Equity: about $530,000. Share consumed: 61 percent, and the loan passed the 50 percent cap around year eight.
All three families keep the house and keep positive equity. The difference in what they leave behind is over $600,000.
Testing Your Own Numbers
The reverse mortgage calculator lets you put in your own home value, age, amount and an assumed growth rate and see the balance and equity year by year. Run it at the current rate and again at one percent higher.
If you would like it done properly for your situation, with the drawdown structure that suits you and both lenders’ limits applied, that is the written projection I prepare before any client decides. The advice page explains what is involved.
