Retirement village living vs reverse mortgages in a nutshell

Village life comes with services and shared facilities. You can buy a unit, townhouse, or apartment and there are different options depending on the level of care you need.  

You do not purchase an interest in the title/unit but a right/licence to occupy. This is known as an Occupation Right Agreement or ORA.

A lump sum payment is made up front, usually referred to as the “purchase price” or “licence fee”. There are also either weekly or monthly service fees – this amount can increase and will depend on the level of care you require. These payments cover your insurance, rates, and village maintenance.

Prior to entering the retirement village there is usually a requirement that you have a current Will, Enduring Power of Attorney, and a doctor’s certificate that confirms your suitability to join  the retirement village.  

When you leave the village the purchase price gets repaid to you minus the “deferred management fee”, also known as a “facilities fee” or “village contribution fee”. This is usually around 25-30% of the purchase price. This fee can accrue over the years until it reaches the maximum deferred management fee but if you were to leave earlier the fee may not be as high.

A reverse mortgage (also called an equity release loan) is only available to people over 60. You need to own your home mortgage free or almost mortgage free. There are criteria for the type of properties eligible for these types of loans.

You borrow an amount of money against the value of your property. The loan does not get repaid until the property is sold or you die.

The amount you can borrow will depend on your age (if there are two borrowers, the age of the youngest is used). The amount is usually between 10% to 20% of the home’s current value.

The loan can be paid to you in a lump sum or instalments.

Currently, two New Zealand banks offer Reverse Mortgages- Heartland Bank and SBS Bank.

Both:

• Charge compounding interest monthly.
• Require clients to get independent legal advice.
• Have a negative equity guarantee (if the house is worth less than the loan and the full amount of the loan cannot be repaid, the bank guarantees it will not come after you or your estate).

Pros:

• No maintenance to worry about - the village takes care of the upkeep of the grounds and communal areas for you.

• Social aspect – there is a community of people, events planned, and shared facilities to enjoy.
• Care facilities are offered - different options are available depending on your needs. If your needs increase while at the facility you can move to a different unit (priority is usually given to existing residents).
• ORA’s can be held jointly and passed on to the survivor.

Pros:

• Enable you to stay in your own home – it frees up some equity in your home without having to sell your property.

• You do not make any repayments until the property is sold.
• The funds can be used for anything you like – improvements, medical treatment, lifestyle.
• Gives you autonomy and flexibility. You can have pets and people come to say, and make any alterations you want to make to your property.

Cons:

• The length of time friends or relatives can stay with you is limited.
• Cannot make alterations to the unit or property without permission.
• Limitations on pets. Depends on the contract, type of pet, and the  unit/apartment/villa you have. Ultimately at the discretion of the village. 
• No capital gains. You do not have an interest in any increase in value of the unit you’re occupying. The amount you will get paid out is the amount of the “purchase price” for the ORA, minus the deferred management fee.
• After you leave the unit you or your estate will usually have to continue to pay the weekly/monthly service fees to cover the outgoings until a new occupant is found.
• Delay in repayment of purchase price. The purchase price (less the deferred management fee) is usually not paid out to you or your estate until a new occupant for the unit has been found.

Cons:

• Because you’re not making any loan repayments, the compounding interest can quickly eat away the equity in your home, so only take out the amount you need.

• Could limit your choices later in life. You may repay the loan amount but be left with insufficient funds to move into a retirement village if that is what you want or need.
• Interest rates are floating so can increase during the term of your loan.
• You must continue to reside at the property. You cannot usually rent, sublet, or tenant the property. This could be an issue if you decide to go travelling and want to rent out your property.

Make sure the ORA is in both partner’s names - if a couple, both parties should be recorded on the ORA otherwise if one passes away before the other, the agreement would be at an end.

Ongoing costs – make sure you know what the weekly/monthly costs are going to be and factor in that they can be increased.

Research the cost of a retirement village first. If you were to sell your home now, pay the “purchase price” to move into a village and pay the subsequent monthly/weekly cost, how much money would be left over? If it were a considerable amount, then a reverse mortgage could be a good option for you.

Be sure to use up any savings you have first because ideally you want to have the loan for the shortest period of time possible as the interest is compounding over time.