South African pensioners are now able to convert their homes into retirement annuities without selling their property. Although this product has been available in the United Kingdom, United States and Australia, local banks have taken a while to come to market with a similar product, mostly due to the previously volatile nature of the South African property market. Now that it has stabilised, Nedbank is the first bank to offer a reverse mortgage equity product, which is based on a similar model in the UK. In a nutshell, Nedbank will forward a pensioner a loan, based on the value of their home, which can ultimately be settled by the sale of the property.
In a country where approximately six out of 100 people will be able to retire in comfort, accessing the equity built up in a home without having to sell will be a welcome relief for many retirees, although probably not so welcome by their heirs.
Nedbank’s Home Income Plan will provide an initial five-year loan ranging from 10% to 45% of the property value, depending on the client’s age. The client can choose between a lump sum or a monthly income over the full term. There are no monthly repayments and, at the end of five years, the client can either settle the loan (with interest) or take out a further five-year loan. If the retiree opts to roll the loan to enjoy income benefits without having to repay Nedbank, the proceeds of the eventual sale of the house — when the client moves out or dies — will be used to settle the loan.
By limiting the percentage it will lend, along with conservative estimates of the growth of the property market and life expectancy, Nedbank has taken caution when creating its product to ensure that the value of the loan will never exceed that of the house, or that the retiree is never put in a situation where they have to sell the house to cover the loan amount.
Used correctly, this is a great product to supplement income and will also, no doubt, be used by tax planners — equity drawn from the house can be given to heirs, limiting estate duty.
However, it is important to remember that rolling over the loan continuously will leave little of the asset for heirs. There is also a cost in borrowing and, at the moment, the fixed five-year interest rate is 1,95% above prime. In order to minimise the interest charged, it would be better to opt for a monthly annuity rather than a lump sum, as interest is only charged on the money when it is drawn.