Made of money

Reverse mortgages have opened up a new source of cash for clients and provided another tool for advisers in the retirement planning process.

While the idea of advisers selling mortgages was something never considered in the past, reverse mortgages did offer many retirees a significant alternative source of retirement income. Some advisers recognised this and warmed to their use.

Technically, selling reverse mortgages is easy in all states except Western Australia, where mortgage brokers are licensed.

In other states mortgage brokers are not licensed, so advisers can legally add them to their list of products.

While selling reverse mortgages is still viewed with suspicion by many advisers, this is changing.

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Today, reverse mortgages are seen as something to have in the toolbox to deal with certain situations such as a client that is asset rich, but cash poor.

Typically, the client is at the older end of the age scale, live on a Centrelink pension and own their home outright.

They are from a generation where owning the family home was the financial goal to be achieved in their lifetime.

The family home has been in their possession for many years and its value has grown considerably. But, for a variety of reasons, the client needs to raise cash to pay for some unforseen emergency, which ranges from making the home suitable for someone disabled to general maintenance on the family home.

The client also doesn’t want to move out of their home or the surrounding area.

A reverse mortgage can be the solution to these cash demands and in the past a financial planner probably would have been unable to help.

Collins House Financial Services managing director Dominic Alafaci praises reverse mortgages as the tool to help clients that historically he would have turned away.

“At Collins House we normally help people who have money to invest, but we used to have to turn away people without money,” he says.

“Now with reverse mortgages, we can help people — these people who are asset rich, but cash poor.”

Alafaci says the funds raised from a reverse mortgage are usually used to deal with some crisis that has arisen, such as emergency repairs to the family home, or to supplement their income.

Bluestone Equity Release chief executive officer Peter McGuinness says reverse mortgages are a retirement planning tool that is typically used for clients who are over 60.

“These products are generally considered to be an alternative form of income supplement in retirement,” he says.

“It also treats the family home as a financial asset, which was not done in the past.”

The current generation using reverse mortgages has also missed out on the compulsory superannuation system to build a nest egg for retirement.

McGuinness says it was also the generation that was against high risk and yearned for the security of bricks and mortar.

“What savings they had after paying off the family home are running down, so the adviser has to come up with strategies to plug the gap,” he says.

“The option of selling the family home and downsizing is usually not acceptable.”

According to research by Bluestone, the typical reverse mortgage is taken out by someone who has been in retirement for at least five years.

The research also found that 80 per cent of retirees own the family home outright, although the Baby Boomer generation might push that figure down in the future, as they have tended to be slower paying off the traditional mortgage.

“Our clients are starting to see what savings they have left, and historically they have not included the traditional asset, which is their home,” McGuinness says.

“As a result, they are putting their best asset last in the decision-making process.”

Because reverse mortgages have a limit on the amount of capital that can be taken out of the house, the planner can advise the client only to access the actual amount they need.

“A reverse mortgage is a mechanism that allows the client to solve their capital need without disturbing the structure of their financial plans,” McGuinness says.

“In the past, to raise the sums they wanted, the client inevitably would have had to put the family home up for sale.”

To date, advisers have not been the main distribution channel for these products. Bluestone distributes 45 per cent of reverse mortgages through mortgage brokers and a very small percentage through advisers.

“I am more confident advisers will become a growing distribution channel and be more prevalent in years to come,” McGuinness says.

The opposition to reverse mortgages by dealer groups seems to be changing.

Ipac now says it is looking at adding reverse mortgage products to its lists, however, this will not occur until some time next year.

The dealer group is weighing up all the options on the products and how they would fit into clients’ strategies.

Synchron director John Prossor says his group has only recently started to allow advisers to use risk mortgage products.

“This was partly due to advisers joining Synchron who had held authority to use the products in their old dealer group.

“We have been looking at them for people who have a second property, such as a holiday home, that has been revalued and they are now living on a minimal pension,” Prossor says.

“The reverse mortgage on this property gives them some living money while still retaining the property, which may have been in the family for years.”

Synchron provides advice on reverse mortgages but then passes clients to a mortgage broker to execute the transaction.

Prossor argues that it is difficult to add a reverse mortgage product to a traditional approved list because it is a credit not an investment product.

“But we are now looking to go to the next stage by appointing a product provider that will enable those advisers approved to handle reverse mortgages to handle the complete transaction for the client.

“However, we will be looking for safeguards, and the product will only be used for those clients where a reverse mortgage is the best solution to their needs,” he says.

Another dealer group that has taken a cautious approach is Matrix Planning Solutions.

The group’s national marketing manager Geoff Martin says it took a long time for the dealer group to be convinced reverse mortgages have a role to play.

“We have only just put our first product on our approved list,” he says.

The first product is from Bluestone and Martin says the group will probably add one or two more eventually.

“We have got to ensure the advisers understand reverse mortgages and when they can be used and when there are other solutions to the client’s financial needs,” he says.

“I think there is a place for reverse mortgages in the group, but we have got to be careful how we use them.”

Matrix is working through the compliance issues of adding reverse mortgages to its lists and Martin admits there is a lot of responsibility on the group and its advisers to ensure the products are properly used.

“The adviser really has to understand the client needs and make sure they are aware of what will happen when the mortgage is taken out,” he says.

“The adviser has to make sure it is the best solution for that particular client and all other options have been explored first.”

Alafaci says while he is encouraged that more advisers are using reverse mortgages, he is concerned that the products can be misused.

“I hope advisers don’t use them so clients get some cash so that the adviser can sell them some investment products,” he says.

So far there has been no evidence of that happening, although as the popularity of reverse mortgages with dealer groups grows, then inevitably there will be cases of misuse in the future.