Controversial "granny mortgages" are facing a crackdown by the Reserve Bank.

The loans - also called "reverse mortgages or equity release" - have been criticised for being capable of wiping out the value of a family home and leaving relatives with nothing. Reverse mortgages work by home-owning seniors borrowing cash against the value of their property with the debt recovered with compound interest when they die or move.

But the Reserve Bank is moving to protect banks rather than borrowers. It fears lending banks could be left underwater if house prices slump or interest rates rise, and plans to force them to put more capital aside to cover the higher risk.

The loans are already much more expensive than standard home loans, and experts believe tighter regulation could further widen the gap.

One lenders calculator shows a 65-year-old who borrowed $100,000 against their $500,000 home would owe $1.2 million at age 95, or 12 times the original debt. They would also have wiped out all their equity, assuming house prices rose 3 per cent a year.

Small changes in rates have a major impact. In the same scenario, an extra 1 per cent interest would see the borrower run out of equity a full five years earlier.

Grey Power organiser Bill Rayner said the loans were a valuable opportunity for seniors who were asset-rich but cash-poor. However, the 74-year-old said the compound interest could rack up fast, especially if mortgage rates rose from their historic lows.

Rayner plans to meet with Senior Citizens Minister Maggie Barry to push for Government intervention towards a much lower interest rate.

Consumer NZ finance and research writer Kate Sluka said while most borrowers cannot be kicked out of their house or end up in debt, they could be left with nothing if they if they had to shift house unexpectedly, she said.

Source: Stuff