Lifetime retirement income have very recently introduced a new product in the New Zealand market. I am sure more will be made of the product in the coming weeks.
It is a called lifetime home and it is a product that provides retirees over the age of 70 the opportunity to turn the equity in their house into income.
That is similar in a sense to a reverse mortgage, but that is where the similarities end.
With the Lifetime home product you don’t have to take on a mortgage loan at a high interest rate that is payable on sale of the property like you would a reverse mortgage. And that is Lifetime’s main selling point. No more home loans.
But is the alternative any better?
With this product, instead of borrowing more money, you sell a portion of your home to Lifetime Income over time. In exchange for 2.5% a year of the houses value in income, you give Lifetime 3.5% equity in your home for 10 years. So if you sell after 10 years, Lifetime will receive 35% of the sale price.
Conditions of Lifetime home retirement income
You must be 70 years or older to access the product. If you are part of a couple, both must be 70 or older.
You must be mortgage free.
Your house must be insured.
You must get a property valuation so Lifetime know how much to pay you and how much they are entitled to.
Standalone houses only. Doesn’t include apartments, cross lease, etc.
Some areas they will not service. I am guessing more rural areas.
Fees for Lifetime home retirement income
You will likely need to engage a Lawyer to look over the contract.
You will need to have your house insured, if not already.
A valuation fee to get the property valued.
You need to pay a one off establishment fee of 0.2% of the house value.
You pay Lifetime 0.23% of the opening value of the house at the time of the agreement in fees per year.
I imagine another valuation report will be required when you sell too, so that Lifetime are happy with the price. After all, they are part owner.
Pros and cons of Lifetime home retirement income
Pros:
Good if you don’t have enough savings to fund your lifestyle. Provides some income for you.
If your house loses value, you get to share the loss. However, I would like to read the fine print on that before declaring a pro.
Unless house price gains are less than inflation, you shouldn’t receive less income than if you sold the house now. Higher house price gains benefit both parties. But you receive a lot less than if you didn’t need an outside party to co own your property. For some people though, more money is not wanted. You could just want enough to pay for your lifestyle and not have to scrimp too much. This product helps with giving you enough to not feel too impoverished.
Cons:
You give up a lot of capital gains of your property which cuts into how much money you have when you sell or how much of a legacy you leave behind.
You pay a lot of money in fees.
Your income received loses value over time as inflation makes things more expensive.
You lose some autonomy on what you can do with your house. For example, insurance is compulsory. Do they restrict what changes you can make to the house too? Or do they have to agree on the sale price? Again one for the fine print.
An analysis of Lifetime home retirement income
We will run through an example. Assuming a $1 million home, the situation would look similar to this:
$5,000 initial fees for Lawyer, valuation, and establishment fee.
You would receive income of $22,700 a year. That is $25,000 income minus $2,300 fees.
Assuming 2.5% a year house price increases, the income you would receive and the income Lifetime receives looks like this:
Income from Lifetime home product
After the 10 year contract, upon sale you would receive around $52,000 and the house has increased in value around $280,000.
Your income is calculated by taking the difference between the current house price and the original house price. In this example $280,085. Then we add all the income that Lifetime have contributed to you over the 10 years. In this example $227,000. Then we deduct the 35% of the property value that Lifetime own. In this example $448,030. Finally, the $7,000 in fees establishing the agreement and also closing it off.
This also doesn’t include the real estate fees for selling the property. That will cut into the $52,000 further.
Yet Lifetime receive over $470,000 in the 10 year period in this example. $448,030 in the form of 35% equity and another $23,000 in fees over the 10 year period.
If the house increases in price by 5% (rather than 2.5%), you would get $278,000 and Lifetime $593,000 in this example of a $1 million house. $220,000 more for you and $120,000 more for Lifetime. The higher increase in house price benefiting you more than Lifetime (but still both) since a higher number is offsetting the fixed fees and because you own a greater percentage of the home which means you receive more from any increase in value.
The other thing for you as a consumer of a similar product to consider is inflation.
Your annual payments in this example are $22,700 after fees from a $1 million freehold property. If we assume your annual expenses are $60,000, the Lifetime house payments make up about 38% of your spending. Yet come year 10, when you are still receiving the same income as you were 10 years earlier ($22,700), you are now spending $75,000 a year assuming 2.5% annual inflation. Lifetime home income now only covers 30% of your spending, rather than 38% like it did at the beginning of the agreement.
Final thoughts
At the end of the day, as long as your house price increases you still receive money in the pocket. You will receive $830,000 from the sale of the property (valued at $1.28 million) in 10 years. Plus you have received $220,000 in income after fees. Minus sales costs of around $40,000 and you may have received around $1,010,000 in 10 years, from an originally valued property of $1 million.
However, $448,000 to be giving away to Lifetime for $227,000 in income is a hard pill to swallow. Higher house price increases than 2.5% and the difference between what you receive and Lifetime receives will narrow. Which is understandable. Lifetime are taking on some risk, so need to be compensated more for the downside of lower returns, than the upside of higher returns. Also they need to be compensated in case you decide to sell the house much sooner than the 10 year period is up. House price changes over the short term carry much more risk than over a longer term.
But even at 10% house price gains they receive more than you after 10 years with the assumptions we used. $930,000 vs $905,000. It is not until house price gains of 10.4% do you receive more income than Lifetime! It doesn’t really matter too much how much they receive, as long as you are happy with your decision. I am just showing the range of outcomes for you.
I compare the numbers used today versus a reverse mortgage in this blog post. Because they are similar in that they use housing equity to produce an income, but very different in their method.
A lot of kiwis are top heavy in property and the product can serve a need. With a lot of your net worth in housing and not much elsewhere, some people simply need to use the equity in their property to make ends meet. Obviously it would be better if you can somehow reduce expenses and a product such as this only used as a last resort.
One other bonus of the Lifetime product is that if your house loses value when you have to sell, then Lifetime share in that loss. But I do wonder if they will be easy to deal with in such a circumstance. They may not want you to sell at a loss and being a part owner, technically they may have a final say in the matter. Also, what if you want to make changes to your home? Will you need permission? That is where legal representation and careful reading of the contract comes in.
Important to some is the consideration of leaving a legacy for kids and grandkids too. This product will cut into this significantly.
Much like a reverse mortgage, for me the cons far outweigh the pros. Inflation, fees, loss of capital gains and loss of autonomy (you now have to consult with a part owner of your property) far outweigh the regular income that is provided.
In first instance, I recommend trying to find where else you can source income from. Then check if you are optimizing your expenses. At least then you can minimize how much of an impact inflation will make. Maybe you can borrow from family, downsize house, relocate to a cheaper area, take on a boarder, find some part time work, and so on. This is really a product of last resort in my view.
If you have no choice you have no choice, but go in with your eyes open and consult legal and financial advice. Don’t forget to involve your family.
I have added an easy to use Lifetime home product calculator for you to have a look at your own numbers here.
If you need help with your personal retirement planning, then get in touch today.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here