Yes, provided the reverse mortgage is large enough to pay the old loan off completely. Neither lender will sit behind another bank. They need to be the only mortgage on the title.
For a growing number of people reaching 65 with a loan still running, this is the main reason they look at the product. The repayments on even a small balance are hard to carry on Super. Clearing them has a real cost, though, and the cost is worth seeing clearly.
Yes, If The Reverse Mortgage Clears It
Say you are 68 with a $700,000 house and $90,000 still owing to the bank at $1,100 a month. Heartland’s limit at 68 is 28 percent, or $196,000. The reverse mortgage can repay the $90,000 and still leave $106,000 available, some of which you might set aside as a reserve.
If the existing balance is larger than the age-based limit, the application fails. A 62-year-old with $200,000 owing on a $700,000 house has a Heartland limit of $154,000 and cannot clear the loan. Options then are to wait, to pay the balance down from savings, or to look at other arrangements.
How The Payout Works At Settlement
The process is the same as any refinance. Your solicitor obtains a settlement figure from the existing bank, the reverse mortgage lender advances enough to clear it on the settlement date, the old mortgage is discharged from the title and the new one is registered.
Any amount above the payout can be taken as a lump sum, left in a reserve or set up as a monthly advance. The arrangement fee, valuation and your solicitor’s fee are deducted from the initial draw, so you do not pay anything up front.
Expect four to eight weeks from application to settlement. The existing bank will want notice, and your solicitor will need time to organise the discharge.
What It Does To Your Weekly Budget
The repayments stop. On the example above that is $1,100 a month back in the account, which on a couple’s Super is the difference between managing and not.
What replaces them is interest added to the loan at 8.25 percent compounding. On $90,000 that is around $620 in the first month and rising. You do not pay it, so the household budget improves, but the loan is now growing at a rate the old loan never did. After ten years the $90,000 is about $205,000.
That is the trade. Relief now, a larger debt later, settled from the house.
Break Fees And Discharge Costs To Check First
If the existing loan is on a fixed rate, the bank may charge a break fee to let you out early. On a small balance with a short time left to run and rates that have moved little, it may be minimal. On a larger balance fixed at a low rate for several more years, it can run to thousands. Ask the bank for a break cost in writing before you commit.
Add the bank’s own discharge fee, your solicitor’s fee for the refinance, Heartland’s $920 arrangement fee and the valuation cost. Realistically, $2,500 to $4,000 in total costs is common, more if there is a significant break fee.
When Keeping The Standard Loan Is Cheaper
Keeping the bank loan is usually cheaper in total if you can carry the repayments, because the rate is lower and the balance is falling.
Three alternatives are worth testing with your existing bank before refinancing into a reverse mortgage:
Extend the term. Stretching a $90,000 balance from eight years to fifteen can bring the repayment under $800 a month, and the balance still falls.
Switch to interest-only for a period. Some banks allow a few years of interest-only for older borrowers, which on $90,000 at a mid-five percent rate is around $420 a month, with the balance held rather than growing.
Use savings or KiwiSaver to reduce the balance. Paying $40,000 off from savings and keeping a smaller loan running may be a better use of cash than earning little interest on it while borrowing at 8.25 percent.
Where none of these work, the reverse mortgage is the right tool. I can usually tell you which it will be after one conversation, and I can talk to your existing bank about the options with you. The advice page explains how that works.
