A Hec of a Good Idea

By Mary Holm

Monday 22nd January 2001

If ever there was a country that could use home equity conversion loans - which enable retired people to use some of the money tied up in their homes - it's New Zealand.

But until recently there have only been two institutions offering these loans. Now, though, a small friendly society is setting an example that could well be copied by others. And a large financial services company is looking into the idea.

We New Zealanders put a lot of our money into housing. It's hard to get directly comparable international figures, but the Reserve Bank came up with the following:

We have just 22 per cent of our net household wealth (assets minus mortgages and other debts) in financial assets, such as shares, bonds and cash. Most of the rest is property.

Americans, on the other hand, have 65 per cent - almost three times as much - in financial assets.

UK households have 55 per cent, and Canadian and Swedish 46 per cent - all more than twice our level.

Given our strong emphasis on housing, it's not surprising that many retired New Zealanders live in an asset worth several hundred thousand dollars but have too little cash to live comfortably.

With a typical home equity conversion loan, or HEC, they would get a lump sum, regular payments or a line of credit to borrow from. When they die - or perhaps when they move to a rest home - their house would be sold and the lender would get some of the proceeds.

HECs are more common in other countries, notably the UK, than they are here.

New Zealanders aren't used to the concept, and financial companies say they are wary of negative reactions to some HEC features.

One concern is that, in most cases, the provider will get back much more money from your house sale than they have given you.

This is fair. A dollar now is worth more than a dollar later. When you take out a mortgage, for example, you might get $100,000 now. By the time you've paid it back, with interest, you might pay $200,000. We're all used to that on a mortgage. But on a HEC?

Also, the provider doesn't want to end up being owed more than the house is worth, when it is sold. This can happen if house values fall or, with some types of HECs, if the loan runs for a long time.

To avoid this, providers often lend much less than a house is worth. Borrowers can be disappointed at how little they get.

Despite these problems, two companies have been providing HECs for some years. They are Invincible Life Assurance (tollfree 0800 951 122) and Taranaki's TSB Bank (tollfree 0508 562 634).

Now financial services company Challenger New Zealand is looking into offering HECs, says chief executive John Rowley.

And the 130-year-old Hibernian Catholic Benefit Society, open to members of the Roman Catholic Church, has recently started to provide them.

Members can borrow up to $30,000, depending on the value of their property and their life expectancy. They can make regular interest payments if they wish. If not, the interest is added to the loan amount.

The Society says it "would not usually call up the loan during the lifetime of the borrower, provided there remains reasonable certainty of ultimate repayment."

In some ways it's easier for a small organisation like this to go where some huge financial companies fear to tread.

Still, the Hibernian Society is to be congratulated for coming up with a product that should serve its members well. I hope other similar organisations do the same.

Mary Holm is a freelance journalist and author of "Investing Made Simple", commissioned by the New Zealand Stock Exchange to write an independent personal investment column. She can be reached by E-mail at maryh@journalist.com. Sorry, but she cannot respond directly to readers.

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