Home alone: housing an alternative income stream

The launch of reverse mortgage products into the Australian market could offer individuals without significant super savings the opportunity to create an income stream in retirement, according to Andy Polson, head of product at IOOF Investment Management.

“We are about to launch a pilot in this space, looking at the baby boomers or the population ahead of them who have had even less time to get access to a super savings environment,” he says.

“Obviously, they have significant amounts tied up in residential property. We are very much of the view that there are smarter ways to unlock the equity in people’s homes and turn that into a possible source of income.”

For this initiative, IOOF Investment Management has partnered with Australian Seniors Finance, and believes the home equity market will grow dramatically.

Ultimately, Polson says they hope to pre-position themselves so that they can “bolt on an income stream product to the side of a reverse mortgage, and create a much more efficient and effective vehicle for the client, rather than having to double-up on fees”.

Unlike many other investment and super products, reverse mortgages probably won’t be a hard sell, with consumer awareness already reasonably high.

Bronwyn Speed, chief financial adviser with Mercer Wealth Solutions, says: “Television programs and some companies are quite aggressive in promoting them to rotary clubs and other community-type clubs. We are getting asked questions about them.”

But the rising interest in reverse mortgages isn’t being driven by cash-strapped baby boomers alone.

Many industry pundits believe that the increasing size of super balances is forcing more people to look critically at how they intend to fund their lifestyle in retirement. And as a result, consumers are now looking at a variety of financial scenarios, in addition to the standard, tax effective annuity-style products.

According to Hogan, “the industry has been looking for more options”.

“It’s being driven by a slightly more sophisticated financial planning market, and more people going to see advisers in retirement,” he says.

“If you had a lump sum of $30,000, why would you bother seeing a planner? You would just take it, spend it, then go on the age pension.

“But now people are finding themselves with $200,000 to $600,000 in superannuation when they retire, so they are saying ‘I had better go and see someone’. So I guess a lot of these choices are being driven by financial planners wanting more flexibility for their clients, in terms of strategies to achieve what they want in retirement.”

Peter Nicholas, director of savings and retirement at AMP, says this new focus on reverse mortgages signals “an increased focus on retirement products”.

“I think that by itself it is a good thing, because it creates greater flexibility and greater choice,” he adds.

However, he also believes retirees should tread with caution.

“It really does call for strong financial planning, because there are so many complex issues. Particularly if you are getting into issues such as the equity in your home — you need to work out whether you will qualify for a pension, how you are going to manage your tax requirements, what the RBL implications are… it’s very difficult for someone to do that in isolation.”

Still, if the United Kingdom is anything to go by, reverse mortgage products look set to be a boom industry here. In 2004, the Brits borrowed a total of $2.76 billion.

Polson says: “I think at some stage the Government would be crazy to not start thinking about providing some sort of exemption for money coming out of property in the hands of people aged 65 for instance, and putting it in an income stream in the same way you do with super money. Because obviously, they don’t want to have to cater for all these people who are asset rich and income poor.”