Breathing new life into reverse mortgages

Reverse mortgages have largely been ignored by financial planners and mortgage brokers, with the product supply rapidly shrinking over the years. Milana Pokrajac finds the needs of the ageing population coupled with government endorsement might bring reverse mortgages back to life.

“Reverse mortgages are different from other credit products, and it is important the law takes into account their unique characteristics.”

Those were the words of the Assistant Treasurer and Financial Services Minister Bill Shorten, who had recently announced what he said would be positive changes for both the consumers and the equity release sector.

As reverse mortgages have long been perceived as dangerous by both consumers and financial planners, the rise in popularity of this product might not come easy.

The lack of interest in reverse mortgages triggered a chain reaction and the sector had shrunk to less than a handful of active providers in 2011.

However, experts believe the needs of the ageing population coupled with government endorsement could bring reverse mortgages back to life.  

Perception

Reverse mortgages are not only complex, but also deal with a very sensitive issue for many seniors – letting go of the equity in homes most have worked their whole lives to pay off.

Depriving family members of all or part of their inheritance does not help the popularity of reverse mortgages which also was further dented by negative media coverage less than a decade ago.

A careful decision making process is required before a client is recommended to release equity in their home.

However, some industry commentators claim reverse mortgages have been largely misunderstood. National Information Centre for Retirement Investment (NICRI) chief executive, Wendy Schilg said product providers were not giving enough information about these products to borrowers and many have been burnt.

“I think that’s where they got their bad name – people go into a reverse mortgage and five years down the track find out that it’s really eating into the equity in their home and they suddenly realise that the house is not theirs anymore,” Schilg said.

NICRI has unsuccessfully sought funding from the Government to set up an equity release information centre.

Targeted consumers still believe reverse mortgages are associated with the loss of home, according to managing director of a reverse mortgage brokerage firm Seniors First, Darren Moffatt.

“That’s not right, and when I tell people that they establish the loan amount they want and that they don’t get charged interest on money they do not use – they realise there is a very acceptable level of risk associated with reverse mortgages,” he said.

In fact, research conducted by Deloitte found that the average loan size as at December 2010 was $72,474, mostly used for regular income, home improvement or debt repayment.

Shrinking space

Although the reverse mortgage market has been growing slowly but steadily since 2005, the number of providers has dramatically shrunk.

The number of Seniors Equity Release Lenders Association of Australia (SEQUAL) members peaked in the 2007-08 financial year, with 15 financial institutions having a reverse mortgage offering.

Those included BankWest, Commonwealth Bank (CBA), Macquarie Bank, St. George, ANZ, Suncorp, Over Fifty Group, Australian Seniors Finance (AFS), and other smaller providers.

Of major institutions, Suncorp and ANZ left the sector within a year of joining, while Macquarie left within two years of tapping into the reverse mortgage space.

By 2011 SEQUAL membership was reduced to eight members, with only four – BankWest, CBA, St. George, and AFS – still actively lending.

According to Moffatt, lack of supply in the market presents one of the major challenges for the reverse mortgage industry.

He further points to the “very basic and stale” product ranges currently available on the market.

“Banks will have to wake up to the fact that the days of previous credit growth rates are gone, and if they are going to have any hope at all matching that, they’re going to have to innovate,” Moffatt said.

“Eventually, they’ll turn their gaze to the baby boomer market – that’s where the numbers are, that’s where the product need is, and that’s where the property equity resides,” he added.

Lack of financial planner interest 

The reverse mortgage sector has grown from $900 million in December 2005 to $3 billion in December 2010, according to Deloitte figures. 

Borrowers are usually assessed based on their age and the value of their home; the age requirement used to be 65, but some providers are now offering reverse mortgages to those aged 60 years.

There were more than 5,000 new borrowers last year, which – although appearing miniscule when compared to other sectors within the financial services industry – represents growth.

However, financial advisers need to step up to the realisation that Australia is on the cusp of change as to how the family home will be viewed in the future, according to SEQUAL chief, Kevin Conlon.

“I’ve been challenging the advice industry to do a better job of providing affordable and accessible advice and to shift attitudes from adviser preferences to client preferences,” Conlon said.

“Equity release is not the only answer, but certainly the family home is going to be significant in whatever strategy they use,” he added.

Being a baby boomer herself, Schilg agreed that the current generation of people heading into retirement would be much more willing to let go of the equity in their home.

“Our children have been on a superannuation guarantee since they started work, so they don’t need that inheritance and the expectation is not there,” she added.

Chief executive officer of the Financial Planning Association, Mark Rantall, commented that financial planners have been making a wide loop around equity release products because of their unpredictability.

However, with the right protection mechanisms in place and proper government regulation, Rantall said these products have a good chance of attracting adviser interest.

Government regulation and endorsement

The better Australians are able to fund their own retirement the less reliant they are on the Government, which presents a huge factor considering that baby boomers will massively pullout from the workforce over the next two decades.

Although reverse mortgage providers were already subject to many government-proposed changes as part of being members of SEQUAL, the Government appears to be determined in increasing client confidence in reverse mortgages by embedding these requirements into law.

The Government released its draft amendments to the National Consumer Credit Protection Act 2009 last month, which would see the introduction of a statutory no negative equity guarantee for clients, allowing them to draw down on the equity in their home without having to repay more than their home is worth.

Other changes include better disclosure of financial consequences of entering into a reverse mortgage, as well as the introduction of certain ethical requirements on lenders.

The Government was, however, encouraged to endorse reverse mortgages during the consultation process, when the Productivity Commission released its inquiry report recommending the Government establish an Australian Aged Care Home Credit Scheme “to assist older Australians to make a co-contribution to the costs of their aged care and support”.

While acknowledging the complexity of equity release products and the consumer nervousness around them, the Commission’s report stated “a public scheme could play an important role in inspiring confidence in equity release products and stimulating market development, although it could also crowd out the further development of private schemes”.

Ageing population to boost the sector

“It is very important to note that the first of the baby boomers have moved into retirement at age 65 this year,” Conlon said.

According to a research report conducted by the Australian Housing and Urban Research Institute (AHURI), 81.2 per cent of people over 60 were home owners in 2006.

AHURI’s report “Reverse Mortgages and older people: growth factors and implications for retirement decisions” noted the market for reverse mortgage borrowers is the population of home owners aged 60 years and over, who tend to be “well informed and proactive in managing their own affairs”.

For those who had already taken out a reverse mortgage, the decision was made based on the ability to manage cash flow, the flexibility on uses for the funds and the ‘no negative equity’ guarantee, which will soon become a statutory requirement.

More importantly, the factor that most influenced their decision was helpfulness of the broker or lender, according to the report, which is where Conlon believes financial planners could find their value proposition.

“The big story is not only the demographic shift, but the shift in attitude as to how the family home will be viewed: as storage of wealth rather than with the sentimentality that has always been attached to it,” Conlon said.

Numerous research papers have shown that the majority of Australian retirees will not have adequate superannuation balances to fund their retirement.

Unless they took a proactive approach to boost their savings, most would be dependant on the Government’s age pension within years.

Rantall believes the demands of the ageing population would help boost the take-up of reverse mortgages, given the right consumer protections were in place.

“With the ageing population, with property prices where they are, and where you’ve got retirees wanting to stay in their home rather than move to a smaller dwelling, reverse mortgages could well be an appropriate source of lifestyle funding – with the right protection mechanisms in place,” he said.

From a financial planner point of view, Rantall said consumer protection is the main consideration.

Outlook

Although there are very few predictions that reverse mortgages will take off in the short term, industry commentators claim the demands of baby boomers with insufficient superannuation balances will provide the necessary boost over the next two decades.

The AHURI report concluded that the demand for reverse mortgage products is expected to rise significantly over the next 25 years.

“As people are living longer, home owners may be willing to trade off housing equity for a level of financial security in retirement,” the report said.

However, Schilg said it is important to consider the economic outlook, too.

“With the economy the way it is at the moment, it is too difficult to guess; but 12 months ago we were saying that the boost might be within the next five years – this might be accurate, but it could also take longer,” Schilg added.

Moffatt from Seniors First blamed the stagnant market on provider lethargy.

“It is interesting that SEQUAL’s numbers on the transactional volume have gone back to the same level of the previous peak, yet there is no marketing or advertising,” he said.

"The natural demand is coming through, and the Government is sending a message that this is something you should endorse, but if banks were advertising – it would explode."