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Rosie and John were left with no choice but to take a reverse mortgage if they wanted to stay in the home they loved, with its big garden backing onto a bush-clad reserve alive with birdsong.

Reverse mortgages are a costly blessing to older people who have valuable homes, but not a lot of ready money.

They allow people to borrow money to spend now, that only has to be repaid (plus interest) when they, or their estate, finally sells their home.

But with floating interest rates of 7.45-7.8 per cent, and application and valuation fees adding up to over $1000, reverse mortgages are more expensive than ordinary home loans.

Rosie and John (who asked not to use their real names) brought their four children out from the UK.

Rosie said: "We didn't have a lot of money, but we found this house, a fairly run-down old house. We put the kids through university, but we weren't able to save."

The plan was to start saving hard when the children were educated. That went out of the window when Rogernomics, the overnight financial reforms of the 1980s, saw John made redundant from his job as an electrical engineer.

He found work, but it was much lower paid.

The pair managed, but when they got into their late 70s they were struggling. The house needed work, and they needed help keeping up the garden.

They considered moving to a retirement village, but didn't want to.

When they decided to go for a reverse mortgage instead, "it took a huge, huge weight off our minds," Rosie said, but she had words of caution too.

"It's better to wait. We waited until we were in our late 70s."

As interest is added to the loan, each year the sum owed to the lender compounds.

At 7.8 per cent, the floating rate loans are more expensive than ordinary home loans, but then lenders have to wait until the loan is repaid to get any money back, and are required have to hold more capital against each loan.

Heartland's loans have a guarantee that people will never owe more than the value of their homes, but the earlier someone borrows the longer interest can make inroads into their equity.

The couple's modest home was in a suburb that gentrified, so it ended up being worth a surprising amount. "We were the typical cash poor, asset rich," Rosie said.

But even so, leaving the borrowing late keeps down the interest.

Heartland's online calculator shows that taking a loan of $100,000 on a home worth $700,000 (borrowers have to pay for a valuation) would result in a debt of $217,000 ten years later.

After 20 years, the amount owed would be $473,486, which may not be a problem if house prices keep rising and interest rates remain steady.

The risk for borrowers is rising interest rates, and stagnant, or declining prices.

Another couple who decided to go with a reverse mortgage are Pete and Janet (not their real names).

They did it after Janet was disabled by multiple strokes.

The value of the house- more than $900,000- reflects prices which Pete reckons are "just stupid", but it's provided a financial lifeline that saved them from having to sell up and move into a retirement village, something Janet didn't want to happen.

"Janet built this house in 1965 and she made up her mind that she only leaves here in a pine box," Pete said.

With the future being uncertain, he and Janet were cautious, and borrowed the absolute minimum.

Heartlands Lisa Hatfield said people often took a few months to make the decision of whether a reverse mortgage was for them.

"We've had people think about it for as long as a year," she said.

"It's a really big financial decisions," said Martine Milicich from SBS Bank, the only other active reverse mortgage lender.

The average age for borrowers is 72 at Heartland.

The most common use the money is home maintenance, but travel and paying medical bills also figure frequently. Some use it to pay off what's left of the mortgage when they stop work.

The daily cost of living is an increasingly important reason, and Heartland now lets people structure loans to give them monthly payments, rather than people having to draw out a lump sum.

Rosie dismisses family concerns about equity transferring to the bank.

"An awful lot of people have this silly idea they need to leave money to their children. If you have put them on the right road to a good salary, what more do they need?" said Rosie.

Pete says Janet's three sons say the same. "The next generation is saying, if you have to, spend it."

Not many people are using reverse mortgages. Only Heartland, and SBS Bank offer them, and Heartland only has 4000 borrowers.

Milicich says reverse mortgages are only one of a number of "equity release" options. Others include downsizing, and moving into a retirement village.

Written by Rob Stock. First appeared on Stuff.co.nz. 

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