Reverse mortgages ease borrower “annoyance” - adviser

His new clients are older people with a small residual mortgage who suddenly become annoyed when their rate of interest more than doubles.

“It's a trend I have noticed in the last few weeks,” said a veteran broker, Maurice Mehlhopt, who focuses almost entirely on Home Equity Release (HER) schemes such as reverse mortgages.

“People with a tail-end mortgage see their interest rate go up a lot and decide just to get rid of it once and for all.”

The scenario goes like this, according to Mehlhopt.

A middle aged couple bought a final home 20 years ago for their teenaged family, for $400,000.

Two decades later, the kids have gone, the couple have retired and just $40,000 is left to pay on the mortgage. It was fixed at 2.5% interest two years ago, making the couple decide it was costing so little it was not worth paying off.

Then, the time comes around to renew the mortgage and the new offer to roll over the loan is more than 6%, leaving the couple aghast.

“They come to me saying they want to get rid of it, so we arrange a reverse mortgage to pay it off,” says Mehlhopt.

Andrew Ford manages reverse mortgages for the biggest player in the market, Heartland Bank.  He has a slightly different take on the HER market than Mehlhopt, attributing the increase in reverse mortgages mainly to the rising cost of living.

He also blames the Credit Contracts and Consumer Finance Act (CCCFA), saying people with tail-end mortgages sometimes can't roll them over because of the strictures of the act.

But he has noticed a practice in the HER field which runs parallel to Mehlhopt's concerns.

“We have seen an increase in the demand for refinancing,” he said.

“There is an increasing indebtedness in retirement, and so we are doing more refinancing, and when borrowers are coming off very low rates, it can be a catalyst for them to look at their overall affairs.”

In other words, people are replacing an actual mortgage with a reverse mortgage in their old age.

And this and other factors are pushing up the HER market by 25% annually, according to Ford.