Time has run out: finding an alternative retirement income

The desire to spend now, repay later, has never been stronger in the Australian psyche.

Credit card balances have never been higher and other forms of credit are also at record levels.

But one group of the population that has always had trouble borrowing is seniors.

Overseas, this problem was solved by allowing seniors to mortgage the family home and take some cash from what was usually their only asset.

These types of mortgages have spread to Australia and are known as either reverse mortgages or seniors home equity release loans (SHERLs).

Product availability in Australia

According to the Mortgage Industry Association of Australia (MIAA), there are more than 18 financial institutions offering reverse mortgages, and mortgage brokers account for about 80 per cent of sales.

However, financial planners are also becoming an important channel of distribution for these products as their popularity among seniors grow.

Australian Seniors Finance (ASF) managing director John Thomas says his company offers a multi-distribution approach.

“We sell 50 per cent of our mortgages direct to clients as people want to deal direct with us,” he says.

“We also sell through affinity groups and partnerships, such as the RSLs mentioning our services.

“In addition, we have partnerships with organisations such as IOOF, where the [reverse mortgage] product has both our logos on it.”

Tests for financial planners

ASF also allows its products to be sold by financial planners after they have been accredited by the organisation.

“Financial planners need to be accredited by us before they can sell our products,” Thomas says.

“This is done online with an examination, which was developed by Deakin University.

“It really means they have to understand the product before they can sell it.”

Planners undertaking the test have to get all questions right before they can be accredited. If they get one wrong they must go back to the start and undertake the whole examination again.

“The planner cannot get five out of 10, it has to be 10 out of 10,” Thomas says.

“We as an organisation don’t give advice, so the adviser really has to understand the product to answer the client’s questions.”

ASF also checks the background of the people selling the products, which includes conducting police record checks.

Lack of regulation

Currently, anybody can sell reverse mortgage products, as the Financial Services Reform Act (FSRA) does not regulate them.

OFM Investment Group head of retirement markets Chris Martin says if reverse mortgages were regulated, only financial planners would be able to sell them.

But he admits the possible licensing of mortgage brokers could create an issue as this might bar financial planners from selling the products.

“While the general rule is that mortgage brokers will become licensed, if this happens it may result in the financial planner only being able to sell reverse mortgages if they become a mortgage broker,” he says.

And Martin says if reverse mortgages came under FSRA it would shut mortgage brokers out of the market.

“This would be unfortunate if financial planners were the only instrument of advice on reverse mortgages.

“It is a significant issue facing the whole industry,” he says.

While companies such as OFM are worried about their channels of distribution being closed, in Western Australia there are mortgage broker licensing laws, and financial planners can’t promote reverse mortgages.

“If a planner has a mortgage brokers licence, they can sell reverse mortgages, but many work on referrals,” Martin says.

“It is a merging of interests.”

Reverse mortgage training

But mortgage brokers are also being more formally prepared for a licensing regime that could include reverse mortgages.

The MIAA is planning to introduce a reverse mortgage education course for its members.

MIAA chief executive Phil Naylor believes it is critical that people taking out reverse mortgages can access information to make informed decisions.

“The new MIAA education program will help mortgage brokers to increase their knowledge so that they are well equipped to inform their clients of all the issues and to assist them in selecting the product that best suits their needs,” he says.

“Importantly, our members do not give financial advice, but they do need to provide reliable information.”

OFM admits it is looking at both advisers and mortgage brokers for distribution. Its only requirement is that the person has to be licensed if necessary and a member of either the Financial Planning Association (FPA) or the MIAA.

“If seniors want advice they favour going to financial planners for discussions, and the Government can provide an exemption for planners to handle reverse mortgage products with changes to legislation,” Martin says.

“A reverse mortgage is different from a traditional mortgage and people expect financial planners to provide advice on reverse mortgages.”

Shouldering liability

Providing advice to clients about reverse mortgages is fairly straightforward, but problems may occur further down the track.

Also, the financial institutions are placing the advice component of selling a reverse mortgage fairly on planners’ shoulders, which will include them in any disputes with beneficiaries of the borrower’s estate.

Financial services lawyer Gary Riordan says the institutions are trying to shift the liability onto the planner.

“Anecdotally, they are asking the planner to provide a Statement of Advice (SOA) saying a reverse loan is alright for their client,” he says.

“It will be the financial planner that is beholden to an institution that legally will be staring down the barrels of the beneficiaries if something is wrong.”

The trigger event is when the borrower is no longer living in the home and it has to be sold as required under the terms of the mortgage.

“The children find out there is this loan and the intent of the parents is compromised by the lender having an equity position in the home,” he says.

“In that circumstance, the beneficiaries are going to be looking for who provided the advice about the loan and looking for evidence about the advice.

“As the borrowers are now passed on, they cannot confirm the advice that was given and this will lead to greater angst by the beneficiaries,” Riordan says.

Surviving beneficiaries

Riordan says it is important that planners ensure the proper ‘tick off’ in the plan for the loan is completed and included in future plans.

“It is also important the parents understand what the loan means and the impact on their will,” he says.

“If the house was left to a child to live in after surviving their parent’s death, there will have to be changes to the will as the house will be sold.

“Clearly, the parents have to understand the house will be sold after their death and any agreements with the children will be void.”

Legally, the mortgage has precedence over a will, as it is a legally binding agreement.

“If the beneficiaries think this is wrong they will probably go to court to overturn proceedings and this will involve the lender and probably the planner,” Riordan says.

“The will has to line up with the potential outcome of the mortgage.”

The planner has to ensure any remaining cash from the house sale is properly allocated to the beneficiaries in the will.

The planner should also seek acknowledgement from the children that they know a reverse mortgage is in place and are aware of the plans, Riordan says.

“Another acknowledgement is that of the parents saying they have discussed the implications of the mortgage with the beneficiaries,” he says.

Martin says the general rule at OFM is that all discussions should involve the children.

“We ask every borrower to speak with the children,” he says.

“Our experience is that 50 per cent want to speak with the children and the rest do not.

“It is a tough call to make that mandatory.”

Thomas says ASF involve the children in discussions, but it is not mandatory.

“We do get a lot of enquires from the children about the product,” he says.

The value of home equity

While there are risks for the adviser selling reverse mortgages, in a number of cases they could be beneficial for older clients who are asset rich and cash poor.

Thomas says while reverse mortgages are not a core product for the planner, they are a useful tool for older clients.

“Reverse mortgages are another tool for the planner who has a lot of older clients and are just doing a yearly review, as there is no more money to invest,” he says.

“The reverse mortgage can be part of that review.”

For many clients, the use of a reverse mortgage is to meet a particular need that is outside their normal budgets. Because this is the generation that retired with little or no superannuation, their life is dictated by a Centrelink pension.

As a result, when they become less mobile and the home needs modifications for them to remain in it, extra money needs to be found.

OFM’s Martin says there are three main uses for reverse mortgages.

“One is for home repairs and modifications as people get older, like ramps and handrails,” he says.

“The other major use is replacing the car.”

The third use is for travel. For many seniors, retirement will be their first opportunity to take an extended trip overseas or to travel around Australia.

Thomas says these three uses are similar to ASF’s list.

“The first type of user is one who needs to borrow to meet lifestyle needs,” he says.

“We find a lot of people who supplement their income for a better lifestyle.

“They use the money to meet annual needs like the council rates, while not eating into their weekly budgets.”

Thomas says the second group use the money to renovate and refurbish their homes.

“It is used for new bathrooms or kitchens or to put in handrails as they get older. Sometimes it is the need to upgrade some facilities in the home if they are to go onto the government home care program.”

Thomas says the last group are people who are better off but want to travel.

Repaying debts

Martin says OFM is finding that some people are borrowing to repay debts such as credit cards.

The reasoning is that the debt can be paid off in one lot and the borrower doesn’t have to make any repayments in their lifetime.

Some loans have been used for investing and Martin says, while this is not illegal, it doesn’t make sense due to the interest payments.

Thomas says borrowing to invest is not happening at present, but it will when the next generation starts to retire.

“The current generation of seniors do not have much superannuation and tend to live off a pension,” he says.

“However, future generations will have larger balances and will be looking to boost their lump sum.

“At this stage that is not very common, but the next generation of seniors will see the reverse mortgage as part of financial planning, as the home will be an asset.”

There is no doubt reverse mortgages are a growth product for advisers to include in their toolbox, but for the unwary, they will be a problem waiting around the corner.