BACKGROUND INFORMATION
REVERSE MORTGAGE CALCULATOR
FAQs Why are you using today’s dollars in this calculator? All Sorted calculators provide results with inflation adjustments so that people can get a relative understanding of costs over time. Inflation is a critical part of financial management and long term planning. The annual inflation level we use is 2%. This is based on the Reserve Bank’s goal of holding inflation between 1% and 3% per annum. Wouldn’t providing results in nominal terms be easier for people to understand? It has been argued that mixing nominal costs (mortgage interest, fees costs) with real house values may be misleading and could paint a picture that reverse mortgages are more financially beneficial than they actually are. On Sorted we present calculator results in today’s dollars. That is, nominal dollars adjusted to reflect the power of inflation over time. The default setting for inflation is 2% per annum. We do this so that people can see the true purchasing power of their money in the future. For example, if you borrow $30,000 today at an interest rate of 12.5% (not including fees), in 10 years time you will owe $97,420 in "nominal dollars" - which is made up of $30,000 original loan and $67,420 interest. However, the purchasing power of that $30,000 will have decreased (thanks to an assumed inflation rate of 2% per annum) so that in 10 years time the value of the original $30,000 you borrowed will be the equivalent of $24,610 in “today's dollars”. Similarly, the value of the $67,420 interest will be the equivalent of $55,308 in today’s dollars. Why does this calculator only work for people aged over 60? This is based on existing equity release calculators in New Zealand. (You have to be aged 60 to get a reverse mortgage with Sentinel who provides 80% of New Zealand’s reverse mortgages.) Why haven’t you presented results years past the life expectancy of a user? The calculator provides a forecast of 20 years from the age input provided by the user. Since the minimum age input for this calculator is 60 years, for most users the calculator results show the costs well beyond their life expectancy.
In developing any tool of this nature there are parameters that we have to work within to ensure people get a clear picture without too much clutter. The goal of this calculator is to provide indicative information to people who are considering taking out a reverse mortgage. It should provide a clear guide but not ALL the answers - which we do explain in the results.
There are lots of ‘equity release’ products in the market. Why did you choose to call this tool the reverse mortgage calculator’? Reverse mortgages are the most popular form of equity release in New Zealand. They are sometimes called home equity release by some companies. However, after reviewing the product names across a range of experts and people in the street, we found that reverse mortgages was a better understood term. The industry sector was also happy with this. QUICK REVERSE MORTGAGE CALCULATOR ASSUMPTIONS: • • • Results are presented in today’s dollars (as are all Sorted calculators). People completing the calculator are mortgage-free when making the calculation. The default property growth rate set at 3.5% which is 1.5% more than inflation. This default assumption was based on consultation with industry and independent financial experts. Life expectancy is based on latest New Zealand population mortality information. Set up fees and legal fees of $2,000 are based on market assessment provided by the Safe Home Equity Release Plans Association (SHERPA), a not for profit association supported by New Zealand’s leading providers and distributors of home equity release plans.
• •
KEY POINTS TO CONSIDER BEFORE TAKING OUT A REVERSE MORTGAGE: • A reverse mortgage can lock the borrower into the current property unless there is a right to transfer the arrangement to a new property. Any property transfers may incur additional fees and may not be possible if the next purchase is a licence to occupy (LTO) property in a retirement village. Reverse mortgages are best suited to the “final” home or where the amount borrowed is relatively low in relation to the value of the home.
•
•