Reverse mortgages in New Zealand: Financing fun for the rich or survival for the poor?

Abstract

The paper examines why loan-to-value mortgage reversals are falling significantly at the same time as the valuation of houses are rising. Our statistical analysis using all of the reverse mortgages provided between 2004 and 2021 by a major reverse mortgage bank in New Zealand suggests five key results. First, there was an increasing initial loan value with age, suggesting the need for greater amounts of income further into retirement either as ‘survival’ when savings dry up or to fund ‘fun’ activities. Second, mortgage release is more likely at middle to high property values, suggesting that the rich are more likely to reverse mortgage to finance cash activities. Third, the loan to value ratio is higher if recipients subsequently go into a care home, suggesting the need to cover care home expenses. Fourth, loan to value ratio is higher if they die during the loan period, suggesting greater time discounting for the short lived. Fifth, there are spatial effects present across regions suggesting single male applicants borrow more, and exit the loan by going into care. These results highlight that mortgage reversals increase income inequalities and quality of life differences over time. With mortgage release being an important financial source of cash for asset rich ‘fun’ and ‘survival’ activities in old age. Especially if ‘fun’ is a loan for single male applicants, prior to exiting to a home with care.