Reverse mortgages
No negative equity guarantee
This is a promise a lender writes into the loan. If you keep to the terms and the home sells for less than you owe, the lender does not ask you or your estate for the shortfall. It is not an Act of Parliament, and it does not mean you keep equity in the home.
What the promise covers
A no negative equity guarantee limits what you have to repay to the net sale proceeds of the home, or sometimes a registered valuation if you repay without selling. Net proceeds means the sale price after the costs of selling. If the loan is larger than that, the lender agrees not to chase the shortfall from your other savings or from your estate.
The Responsible Lending Code, which elaborates on the Credit Contracts and Consumer Finance Act, tells lenders to explain whether your liability is limited in this way. The Ministry of Social Development's Home Equity Release Schemes Code of Standards is voluntary. Lenders that follow it offer this promise. Following the code is not the same thing as a statutory right.
It depends on the terms
The promise is valid only while you keep to the loan terms. Not insuring the home, not paying the rates, letting the home fall into disrepair, or other defaults set out in the contract can mean the limit no longer applies. Ask your lawyer to take you through those conditions before you sign.
It also does not stop the balance growing. A loan can reach the full value of the home. You would not be asked for more than the net sale proceeds if the promise still applies, but there may be nothing left over.
It is not equity protection
Equity protection is an optional extra. You agree a percentage of the eventual net sale proceeds that stays yours, which reduces how much you can borrow, and a fee can apply. A no negative equity guarantee does not set any money aside for you. It only limits the shortfall.
The decision is yours as the homeowner. Family may have a view, and it is worth talking it through, but the choice is yours.
General information only, not advice. We're a referral service and may receive a commission. If a reverse mortgage settles, the lender may pay us a referral fee.
Questions
- Is a no negative equity guarantee the law in New Zealand?
- No. It is a term of the loan, used by lenders that follow the voluntary Home Equity Release Schemes Code of Standards. The Credit Contracts and Consumer Finance Act requires responsible lending. It does not, by itself, give every borrower this promise.
- Can the promise fall away?
- Yes, if you do not keep to the loan terms. The contract lists what those terms are. Ask your lawyer to explain those conditions before you sign.
- Does it mean I will still have equity left?
- No. It limits a shortfall. It does not protect a slice of the home's value. Equity protection, where a lender offers it, is the feature that sets a percentage aside, and it costs you borrowing room.