Lifetime Retirement Income, part of the Retirement Income Group whose directors feature Ralph Stewart, Diana Crossan, and Martin Hawes, has launched a variant on the reverse mortgage.
Reverse mortgages are equity release devices for home-owning retirees, a way to cash up some of the equity in a freehold home.
Heartland Bank dominates this market, with some activity also from SBS Bank. No main banks offer the option, mainly because they sense a reputation trap with heirs who may not realise the family home has been encumbered with a mortgage.
The new Lifetime Home offer is a debt-free equity release income option for retirees aged 70 and above.
It's offer is unique: "No mortgage, no debt, no interest, just certainty and regular income to help supplement your day-to-day living in retirement."
But it is a way to access "the wealth" tied up in retiree's homes. They call it a "debt-free" option, but that needs a lot of explaining.
It does not give a lump sum at the start of the deal, rather delivers a modest "income stream".
This is how they say it works:
You are essentially exchanging an interest in your home for retirement income.
As the homeowner, you sell Lifetime Home normally a 35% interest in your home, which builds and accrues over a 10-year period (3.5% per year).
Lifetime Home buys the equity in your home, at normally 25% of the initial value (an agreed value via an independent valuation), which is paid over a 10-year period (2.5% per year). In addition there are fees and charges to be paid. The purchase price is paid by Lifetime Home in regular monthly income payments.
After 10 years, you retain normally 65% ownership of your home, with the option to extend the agreement if you wish.
After 10 years, whether you choose to extend your equity release or not, you retain the right to remain in your home for as long as you wish, as long as it is safe to do so, "and other terms of the agreement are met".
When you (or your estate) eventually sell the home, Lifetime will receive its interest of the sale price. (see example below).
"When the home is sold, we share the outcome together. If the property value has increased, we normally would share the value 65% homeowner and 35% Lifetime Home. If the property value has decreased, we share the value in the same proportions."
There is no "mortgage" but there is a legal agreement shifting a share of the property's value to Lifetime Home.
In summary, you will receive 2.5% of the initial value of the home each year. This will be paid less fees, fortnightly for 10 years (so, after those 10 years, you receive a total of 25% of the initial value of the home less fees and charges).
At the end of 10 years Lifetime Home will have a 35% interest your home.
Income payments cease after 10 years; however, you can remain in your home for as long as you wish, subject to the terms of the agreement.
The annual fee paid to Lifetime Home is based on the initial value of the home at the commencement of the agreement, at the rate of 0.23%. For a $1 million home, that is $2,300. The status of GST is unclear at this point..
The "retirement income" is worked out in the following way.
Firstly, there is the agreed initial value following an independent valuation.
The initial value of the home determines the retirement income payments.
Here is an example using an initial value of $1,000,000. Lifetime Home will be buying a 35% interest in the home, in exchange Lifetime will pay 25% less fees over 10 years.
Note the numbers represented are for demonstration only.
| Year | Homeowner Annual Income* |
Annual Fee* |
Homeowner Total Income Received* |
Lifetime Interest in Home |
Homeowner Interest in Home |
| One | $25,000 | -$2,300 | $22,700 | 3.5% | 96.5% |
| If the property was sold after one year, Lifetime would receive 3.5% of the sale proceeds. | |||||
| Two | $25,000 | -$2,300 | $45,400 | 7.0% | 93.0% |
| Three | $25,000 | -$2,300 | $68,100 | 10.5% | 89.5% |
| Four | $25,000 | -$2,300 | $90,800 | 14.0% | 86.0% |
| If the property was sold after four years, Lifetime would receive 14% of the sale proceeds. | |||||
| Ten | $25,000 | -$2,300 | $227,000 | 35% | 65% |
| Eleven | $0 | $227,000 | 35% | 65% | |
| Fifteen | $0 | $227,000 | 35% | 65% | |
| * paid fortnightly | |||||
At year 10 if the home is sold for $1,000,000, after real estate agent and other transaction fees for selling the house, the home owners will have received $227,000 in 'net' income over 10 years plus $650,000 residual from the sale proceeds as a lump at the end. Lifetime Home will have received $373,000, being $23,000 in fees over the 10 years, plus $350,000 as their share of the sale proceeds.
At year 10 if the home is sold for $1,250,000, after real estate agent and other transaction fees for selling the house, the home owners will have received $227,000 in 'net' income over 10 years plus $812,500 residual from the sale proceeds as a lump at the end. Lifetime Home will have received $460,500 being $23,000 in fees over the 10 years, plus $437,500 as their share of the sale proceeds.
Everything in this article is indicative only. How taxes work, including GST on the fees (if any), and income taxes on the "income" component, the application of the Bright Line test, and the like, will need specialist advice from a qualified professional and are not included in the above summary. You will also need to assess how future inflation will affect your position, especially in relation to the fortnightly payments. Do not enter into any agreement without first taking proper advice. This would be a major and significant transaction.
46 Comments
Such an interesting article, refreshing.
Quite an inovative approach to equity release, is this proprietary or a model imported from overseas? I assume that the 25% vs 35% is because interest is not being applied to the income paid? $2.3k fee feels high.
I'll crunch the numbers.
This reads like a word play: a mortgage that shall not be called a mortgage. 'No main banks offer the option, mainly because they sense a reputation trap with heirs who may not realise the family home has been encumbered with a mortgage.' So turn to a non-bank for a non-mortgage that will still have hopeful heirs saying 'Bugger!'
The real problem here is the cultural expectation that the hopeful heirs have any right at all to assets that they didn't accrue. I encourage my parents to spend their money how they want to - I don't need it. Do others not teach their kids to fend for themselves?
Inflation aside, you're losing 12.3% of your equity instantly and 35% of all future gain. 10% plus 2.3% in fees.
For the 22.7% you get back, surely downsizing and structured TDs is more fruitful.
Sell $1m home, buy $773k home, end up with the cash in hand plus interest.
Don't talk in $, talk in %
This product has an IRR of 28% assuming annualised house inflation of 3% (that's important). That's for year one
It willchange and also needs to be adjusted by the life expectancy tables which isn't mentioned
Very lucrative for the lender, I like it.
There are two competing forces, funding the payments to the borrower (a cost) vs potential house inflation uplift (benefit).
Compounded house price = (1+3%)^10y * 35% assuming hpi is 3% = 34%, 5% = 63%
So assuming 5% annualised house price, at t+10y the lender walks away with $1.63m * 35% = $570k
The future value of 10y of income to the borrower is $344k, which leaves the lender $226k in the black at t+10y.
The average return on that can be calculated as the $226k/average loan balance, so crudely ($226k/$172k)/10 - so 13%
I would need to go through this again as I rushed it.
Actually you're right - as a Heartland shareholder I should be rubbishing this and pointing people towards their reverse mortgage scheme. Keep away from this scheme!
However, as a normal citizen I like to see more competition and options in this market. If it looks too expensive, don't buy it - just like any other product.
How does it look good to you, by squinting? At what point would it not be good, lets say 20/35 ratio or do you still want more... pay out 15 percent in equal amounts across the year and get 35 percent
On the surface its a 40 percent yield (35/25) without needing to look at the small print
Super is already effectively means tested. Super is taxable so the government gets back up to 39% through tax plus the basic Super is a pittance with no ability to get the separate accommodation supplement (or any other allowances) unless a means test can be passed. When Super was first introduced it was 65% of the average wage and included an accommodation portion. Subsequent govts reduced Super to 60% and carved out the accommodation supplement.
Thanks, Malamah. Seeing the downside is harder at their roll out promotion evenings. But you do get to keep your home when you're ancient and attached much, for what that's worth. And the unspoken selling point is that the scheme gives you certainty and hassle free cash income.Those asking the questions did have multimillion dollar homes...
Well, I don't have the time or the patience to type it all out.
If you assume it runs the full 10 years then you need to calculate the lenders funding cost of the net payments, $22,700 pa). I calculated this as $344k future value using the swap curve. The t+10y house price is easy, 6% compounding was $1.63m from memory, 35% of that is $570k.
So net at point t+10y there would be a net $226k net for the lender before any transaction fees etc. That assumes 6% house price growth, and funding at the swap curve which they wont.
If you say your average loan balance is $344k/2 = $172k over 10 years, then you are earning $22.6k/$172k = 13% pa very crude.
The lender is super senior at max 35% LVR so that's attractive, it's a massive play on house price growth. The whol thing falls over without it.
Quite clear thanks...on 100 percent borrowings for the lender they make the numbers work nicely.
Of course the longer the scheme runs, the more profitable it becomes since by year ten they are paying the homeowner $22700 annnuity while earning $35000 x 1.06 ^10...over $62000
Yes, but they have to fund the annuity cummulatively until such time the house is sold.
It has the features of a 10y zero coupon bond weighted by the borrowers life expectancy.
If you can find the right funder it's quite attractive, I bet the rates kick up at 10y if not repaid.
The new Lifetime Home offer is a debt-free equity release income option for retirees aged 70 and above.
It's offer is unique: "No mortgage, no debt, no interest, just certainty and regular income to help supplement your day-to-day living in retirement."
This is not a lending / loan / credit product.
The house owner is selling 3.5% of their house each year to Lifetime Home for 2.5% of today’s valuation. (Beware the valuation that they use is from an independent valuer and not unduly low, which benefits Lifetime Home)
It seems that Lifetime Home is unlikely to pay for ownership costs as their proportion of the house ownership increases.
CAVEAT EMPTOR
Remember, Lifetime Homes are paying out that money today, in the hopes of being repaid in the future. They will shoulder the cost of capital in the meantime. A business paying out 10K today and expecting to be repaid 10K in 10 years is going to very quickly go bust.
Following Heartland, they have had to undertake multiple capital raises to fund the growing reverse mortgage business. The share price has fallen significantly because many are essentially unwilling to wait so long for the profit. The big banks got out of the market for this reason.
Seeing a few comments about the bank not participating in the costs of owning a property, like rates, insurance and maintenance. Remember that the flipside of this is true, despite having 65% equity stake, the original homeowner benefits from 100% of the owner equivalent rent.
Also curious if the costs of renovations will be factored in as equity infusion. If not, it might just incentivise owners to do less maintenance and let the house rot a bit.
I admit I'm particularly dumb at my age, but can someone tell me how this scheme will be funded by Lifetime.
Taking the cited example, one owner of a $1,000,000 home has received a total of $90,800 after 4 years.
Say Lifetime initially signed up 100 similar valued homes, then after 4 years they would have paid those owners a total of 100 x $90,800= $9,080,000.....a not insignificant amount. Where do Lifetime obtain this kind of money with no mortgage security by whoever lends Lifetime the money e,g. banks ????
The obvious answer is that I'm missing something. The only answer I can come up with is that Stewart, Crossan and Hawes have very deep pockets and as multi-millionaires they are self-funding it.
Or, are they being lent their funding by a partnership with other wealthy individuals?
Surely it couldn't be a 'finance company'-type funding where the investor gets a proportion of Lifetime's ultimate capital return after the house is finally sold. This would be a very long-term investment with no regular yield. But, when the final payout does occur that payout would be tax-free because it can't be deemed income as such, it would be a capital gain, especially desirable if the house grows in value over the period. At the moment there is no capital gain tax , but in the (near) future there surely will be. If there is a capital gain, it surely wouldn't be retrospective, but early-bird investors could do well but investors after a capital gains tax was introduced could find their eventual payment significantly reduced.
Debenture? After a few years Lifetime will be receiving inflows of cash whether its from sale of properties to move to retirement village or sale of deceased estates.
Can I ask, did you sell your first-home to grange motel, its getting more intensive around there now.
FAQ
Lifetime Home Frequently Asked Questions (lifetimeincome.co.nz)
A couple of other questions:
1) how credit worthy is Lifetime Homes? If there is high credit / counterparty risk, then there is a risk that Lifetime Homes misses their payment obligations. - I couldn't see any financial information on Lifetime Homes's financial position on their website.
2) what happens to the equity stakes in the event of bankruptcy or liquidation of Lifetime Homes?
3) if capital gains tax is brought in future, then the payments could be subject to capital gains tax
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