Reverse mortgages - home is where the equity is

Lack of financial planner interest in reverse mortgages presents one of the major challenges for the equity release sector. John Thomas lists some of the things to consider when recommending a reverse mortgage to a client.

Home equity release products (the most popular of which is the reverse mortgage) have been around for many years, going back at least to the days of the Advance Building Society. However, it is only in the last six or seven years that senior Australians have embraced them.

Family home becomes an asset

This change has seen seniors – with the general support of their families – recognise the home as an asset which they have the right to access for their needs in senior years.

It saw them overcome the long held Australian philosophy that the family home should be bequeathed to the family, regardless of the size of the dwelling. With the support of the family, home equity release is now recognised as an entitlement and certainly should not be seen as a failure to provide.

As a result of this thinking there are now just over 41,000 reverse mortgages operating in Australia (there are other home equity release products such as shared equity in addition to these) representing a loan book of $3 billion with an average loan of $72,500.

This book of business has been generated almost exclusively through the direct sales channels of product providers (55 per cent) and intermediaries (45 per cent).

The intermediary channel is almost exclusively represented by mortgage brokers with almost none coming from the financial planning industry.

Some sources suggest that financial planners are not interested in this product because of the low commission rewards, especially where in most cases there is no trail commission.

Intensive labour is also required to complete a sale - most mortgages are processed within three or four discussions with the borrowers and sometimes their families.

It is distressing that planners have not been more active in this area of retirement planning and to some degree ignore the social responsibility that exists to the seniors of our society.

It is somewhat understandable that there hasn’t been any great engagement with the existing reverse mortgage borrowers given that the average age of current borrowers is 74 years, most of whom haven’t had any exposure to a planner.

Shift in demographics

This situation will change as the incoming seniors will be mostly the baby boomers, who almost certainly will have engaged with a planner during their working life and will see the home from a different perspective to their parents.

They will see it as an asset to maintain their lifestyle desires and requirements.

Therefore, home equity release could well become the fourth pillar of retirement and financial planning. This will surely cause planners to engage with their clients to determine when to use the equity in their homes as part of their financial plan.

In some cases it can be desirable to access equity in the home before accessing superannuation or other investments.

This is where planners can add value by providing the correct strategy, including providing affordable financial advice, to achieve the best result for consumers and protect entitlements to appropriate government benefits.

This often involves engagement with families, so it provides opportunities not only to continue to serve existing clients, but possibly develop practices through engagement with family members.

Things to consider

Reverse mortgages (as well as all home equity release products) have been used for a wide range of purposes and whilst the use of the money is the exclusive right of the borrowers, we have found that almost all borrowers take just the amount they need and the three top uses are for:

• regular income to supplement existing income
• home improvement in order to allow access to government home care services, allowing them to stay in their home, and
• repayment of debt, mostly credit card debt.

Reverse mortgages provide a number of benefits and protections for customers:

1. There is no need for regular repayments of principal or interest.
2. Guarantee to live in the home for as long as the borrowers wish.
3. A no negative equity guarantee which ensures that borrowers, or their estate, are never required to repay more than the net sale proceeds of the security when it is sold.

Similarly there are protective requirements to be observed prior to the completion of the mortgage:

• Mandatory independent legal advice on the mortgage contract.
• Strong recommendation to engage with the family.
• Check Centrelink requirements.

It is here that financial planners can play an important role by making financial advice more accessible and affordable. Presently, the cost of financial advice can be prohibitive, especially for those who are taking a reverse mortgage to deliver their life’s needs.

So while the planning industry has not been to the forefront in using home equity release as a retirement and financial planning tool, there is a growing need. The opportunity exists for financial planners to engage in the sector now to the benefit of both consumer and adviser.

John Thomas is the chairman of the Senior Australians Equity Release Association.