Factoring in the family home

Kieren Dell

The reverse mortgage market has experienced rapid growth in the past three years, which means changes for professionals in the financial services area.

The results from Australia’s first comprehensive study into reverse mortgages were released in October showing the market had more than doubled in the 18 months to June 30, 2006.

The Senior Australian EquityRelease Association of Lenders (Sequal) is the peak industry body for reverse mortgages, and commissioned actuarial firm Trowbridge Deloitte to undertake the inaugural research.

The aim of the research was to gain a greater understanding of the current trends in the reverse mortgage industry. The data will be updated every six months.

Growing market

There are currently over 20,000 loans in Australia, which equates to an outstanding loan book of over $1.1 billion. This is a substantial increase from previous years (see table Money Management January 25, 2007 page 20).

In the past, reverse mortgage providers offered products with variable interest rates. These account for 85 per cent of all current loans. However, fixed interest rate loans are becoming more common and 25 per cent of new loans have fixed interest rates.

While 90 per cent of loans are taken in lump sum payments, 20 per cent of loans established in the first half of 2006 took advantage of the regular draw down option. These two statistics can be best explained by the diversification of products now available in the market.

As reverse mortgages become more popular, the number of products and options available to retirees are constantly being expanded. This represents a challenge for planners as they strive to remain current with their advice.

While 75 per cent of existing loans were distributed directly from the lending institution, nearly half of the new loans written in 2006 were distributed through third-party intermediaries, such as financial planners and mortgage brokers.

This trend should continue, with financial planners in particular having the opportunity to integrate reverse mortgages into more general retirement planning advice.

A recent survey released by Trowbridge Deloitte (commissioned by one of Sequal’s members) showed that over 90 per cent of the top 25 dealer groups surveyed had recently added reverse mortgages to their approved product lists (see pie chart).

Couples account for 45 per cent of all reverse mortgages, with single females close behind at 40 per cent. Single women are likely candidates for reverse mortgages, as they have less superannuation in general, tend to live longer and a single person receives a far lower pension than a couple. In addition, they may require extra assistance in the maintenance and repair of their home.

The study also found the average loan size was $53,300, with an average borrower age of 74.

However, there was a decrease in the age for new loans to an average of 72, with the 60 to 69s the fastest growing group, which could indicate a trend for the next decade.

The baby boomer generation is entering retirement, which will see the over 60 population to increase up to 40 per cent in the next 10 years. This population shift is likely to alter the client base for financial services from pre to post-retirement.

Lack of super savings

Another factor in the mass retirement of baby boomers is the lack of superannuation savings they have accumulated. The average boomer couple has less than $125,000 in superannuation, with females having very small amounts on average. This is well below the $600,000 ING suggests is necessary for a comfortable retirement.

It will be an increasing issue for baby boomers to maintain the lifestyle they currently enjoy.

Financial planning will become an essential tool for baby boomers to achieve this lifestyle. Accessing the equity in their homes could be a way to supplement other income, which means planners must take a holistic approach to retirement financial planning.

Planners can help their clients investigate downsizing the family home, borrowing from family, adjusting their lifestyle to adapt to a reduced income, or using a commercial equity release product, such as a reverse mortgage, where it is appropriate.

This plan should enable them to maintain a lifestyle they are comfortable with and suit their financial limitations. It is also important for planners to regularly update the financial plan. If the living situation of a retiree changes, their retirement financial plan must change to suit this situation.

For this reason, the success of reverse mortgages in the future is linked to the ability of the financial services industry to give appropriate advice to retirees. Education standards and general public education will help to ensure retirees have a holistic financial plan in place.

In 2006, Sequal launched a set of industry standards for education in this area, and the Mortgage Industry Association of Australia (MIAA) launched the first Sequal-accredited equity release course for planners and brokers. This course allows financial planners and mortgage brokers to become Sequal accredited Reverse Mortgage Consultants (RMCs).

All Sequal-accredited RMCs receive a Certificate of Accreditation to display and they can also use the Sequal RMC designation on their client correspondence and business cards. They will also receive promotion on the Sequal website, where the public will soon be able to search for an accredited RMC in their area. In addition, they will receive updates on industry issues and news from Sequal.

Financial planners can access information on how to complete the equity release course from the MIAA. It is likely that other courses will also appear on the market in 2007.

Kieren Dell is the executive director of Sequal.