Paying off debt is the number one reason retirees take out reverse mortgages, according to one bank.

Heartland Bank passed the milestone earlier this year of having approved 20,000 reverse mortgages, whereby elderly homeowners borrow against the equity of their homes and only pay it back if they decide to sell and move to a new location.

But renovations and necessary repairs are no longer high on the list of reasons people borrow for their homes later in life, says Andrew Ford, general manager of reverse mortgages at Heartland.

“Last year, debt consolidation and home improvement were about the same. Debt consolidation has overtaken that,” he says.

“Debt consolidation now accounts for more than half of our loans; Paying off an existing mortgage, credit card, paying off a personal loan.”

There is mounting evidence that more people are retiring in their late 60s or early 70s with debt such as mortgage debt and credit card debt.

Some pay off this debt by downsizing and moving into a smaller home. But others are turning to home loan reversal, freeing them from repayments that low-income families are struggling to pay.

“It can relieve their cash flow,” says Ford.

It was traditionally thought that a combination of falling home prices and rising interest rates would lead to a drop in demand for reverse mortgages, but rising costs of living and increasing indebtedness among the retired meant that didn’t happen, Ford says.

Sometimes the debt is unpaid mortgage debt, Ford says.

Heartland charges borrowers a variable interest rate that can go up or down. Reverse mortgage debt grows as interest is added, and the debt adds up over time, but that didn’t worry borrowers as the value of their homes rose rapidly and they saw the equity they owned continue to rise even as it did the case was amount they owed increased.

“These are really unusual times,” says Ford. “Higher home prices are really helping. Last year we had record requests, 65% more than last year.”

But despite clear signals that home prices are falling, the demand for reverse mortgages is not there.

“The reason we’re seeing unprecedented demand right now is inflation,” says Ford. “There’s a need, and it’s kind of irrelevant what your house price has been doing.”

Inflation, including rising rates, is putting great pressure on older, wealthy and low-income homeowners.

“It’s all very good if you have an investment portfolio and other sources of income, but if you’re just betting on NZ Super, higher inflation and higher insurance costs, it becomes very difficult,” says Ford.

Financial author Martin Hawes says taking out a reverse mortgage is a big decision. “To those who have spent their entire lives trying to get out of debt and cut down the house against the grain,” says Hawes.

“While it wouldn’t be my first opportunity for cash or income, I think it’s a very useful and practical backbone for those who think they’ll run out of money in retirement,” he says.

The compounding effect can have a big impact.

“If your house was valued at $500,000 and you wanted to borrow 20% in the form of a reverse mortgage, the provider would advance you $100,000,” he says.

“Interest would be about 6% per year ($6000 per year). In 20 years, when the house is sold, the bank will take back the original $100,000 plus the $220,000 accrued and compounded interest.”

According to Heartland, the average loan-to-value ratio of its loans was 9% at the start of the loan. The most common length of time people had reverse mortgages was 7 to 8 years, and the median age at which people took out reverse mortgages was 72 years.

Capital gains on home prices to offset rising debt cannot be counted on, Hawes says.

Ford says people don’t tend to take all the money at once.

Nine out of ten borrowers arranged a loan but only drew part of it, leaving the remainder of the approved loan available for future spending should that be needed or desired.

Some people used reverse mortgages to fund important things like health care. Others used the debt for luxuries and one-off experiences, like a client who arranged a reverse mortgage so he could attend the 2023 Rugby World Cup in France.

One in five organize monthly advances to cover living expenses, says Ford.

Hawes says some families are arranging their own reverse mortgage programs.

“I’ve often seen people researching reverse mortgages and discussing it with the kids, only to find out that one of the kids is willing and able to step in and take the role of the bank and fund their parents,” he says.

This is a direct inversion of the “mom and dad bank,” he says.

“This seems like a good outcome to me, provided the agreement is properly documented and all family members are aware of what is happening,” he says.