Reverse mortgage products in Australia have traditionally been met with scepticism and even outright criticism from the media and prominent financial industry figureheads.
Just recently, the Australian Securities and Investments Commission (ASIC) in its Reverse Mortgage Guide raised concerns that reverse mortgages could potentially see seniors borrow more than needed.
However, the reality is that most seniors are actually using reverse mortgage products sensibly and with measured caution.
We recently conducted the largest study of reverse mortgage users in Australia to identify how these products are being used by seniors.
The results, which were derived from over 425 interviews with reverse mortgage customers, revealed the majority of seniors are well informed about how to use a reverse mortgage and are only using small amounts of the funds available to them.
Predominantly, reverse mortgage funds are being used by Australian seniors to make living on the pension less of a struggle.
According to the study, the most frequent use of reverse mortgages was for home renovations and improvements — creating the double advantage of making the home more pleasant to live in, while increasing the value of the property.
The primary uses of reverse mortgage funds can be seen in the graph below.
Taking a closer look, our study also found that the types of home repairs customers undertook ranged from basic maintenance, such as a coat of paint, to making the property more suitable for retirees to stay in for longer.
In addition to physical comfort, these renovations and improvements can have a significant mental benefit for seniors.
Those reverse mortgage customers who opt to utilise the monthly income option find that amounts as small as $200 per month can transform their quality of life.
Similarly, having a line of credit in reserve removes the fear of unexpected bills. Many customers refer to a line of credit option as a ‘rainy-day facility’, with no interest charged or monthly fees if it is not used.
Another interesting use of funds has been helping family members.
Reverse mortgage customers have assisted their family by paying deposits on properties for children, assisting grandchildren with education or helping elderly relatives in aged care.
A new breed of borrower
Over the past few decades Australia’s baby boomers have been toiling away at work, with many setting aside a nest egg for their retirement.
For most, the bulk of that nest egg is tied up in their home — an asset that financial planners have typically excluded when developing financial planning strategies.
Only one-third of Australians actually have enough in savings to comfortably fund their retirement.
According to ASIC, a ‘comfortable’ retirement income of $38,000 per annum requires a senior to have at least $722,000 in savings at the age of 55. Many have suffered losses to those savings as a result of the global financial crisis and two consecutive years of negative super growth.
Traditionally, reverse mortgage products have appealed to asset-rich, cash-poor retirees.
However, in the current financial climate many seniors with mixed retirement portfolios (super and additional assets) are seeking a more sophisticated and longer-term approach to their financial planning.
We’ve noted that many borrowers are now in need of the support of a financial planner to assess how they can get the maximum benefit from their super returns by utilising other assets (such as the family home) via financial products like reverse mortgages.
The average loan life for a reverse mortgage is approximately 14 years. Throughout this time, borrowers will seek support to maximise the use of their super, assets and reverse mortgage loan to get the best results (eg, drawing on their reverse mortgage loan when rates are lower to give their super returns time to improve).
Borrowers are also seeking guidance about how they should receive their money from their reverse mortgage loan, as either a lump sum, monthly income or line of credit.
As more Australians transition into retirement, it seems the traditional approach of ignoring the family home as an asset in financial planning is coming to an end.
Reverse mortgages at a glance
- The average reverse mortgage size in Australia is $66,000 (Deloitte/SEQUAL).
- Australia’s reverse mortgage market is currently worth $2.5 billion (Deloitte/SEQUAL).
- The reverse mortgage industry is growing at a rate of 23 per cent per year.
- By 2020, 18 per cent of Australians will be aged over 65 (McCrindle Research, Australia in 2020: A Snapshot of the Future).
- Number of financial planners and brokers currently distributing reverse mortgage products: 2,500.
<br Martin Lynch is head of RBS Reverse Mortgages.
