Reverse mortgages could become more popular: Deloitte

Reverse mortgages could become more popular as cash-poor home owners begin to retire and need extra money to fund major expenses such as positions in aged care facilities, according to Deloitte and the Senior Australian Equity Release Association (SEQUAL).

The take-up rate for reverse mortgages in Australia is very low, said Deloitte partner financial services James Hickey, who authored this year’s Deloitte annual Reverse Mortgages Report.

There are around 40,000 reverse mortgages outstanding in Australia now, representing only about 1% to 2% of retiree households, the report found.

“It’s interesting to think about why that may be, and in our view it’s the lack of awareness, the lack of understanding and the lack of support to discuss home equity release with retirees,” Hickey said.

Reverse mortgages were starting to gain popularity around 2005 to 2007 but the products suffered reputational damage when consumer groups came out with warnings that mortgage brokers had been pushing the elderly to take larger loans than they needed.

Several major lenders withdrew from the market when money markets froze during the financial crisis and it became difficult to source funds to back the mortgages.

Only $404 million of new reverse mortgage borrowings were approved in 2013, down from $714 million in 2006.

Source: Deloitte Reverse Mortgage Report, 2014

The major providers of the loans still in the market are Commonwealth Bank of Australia, Bank West and St George. Macquarie Bank relaunched its offering to the market in March.

Last year, the products were included under the National Consumer Credit Protection Act and all of the providers in the market are members of SEQUAL and are bound by its code of conduct.

Hickey said most people have around two thirds of their wealth locked up as equity in their homes when they retire but few think to access the capital to meet their spending needs.

Deloitte estimates that about half of the people who take out a reverse mortgage use the proceeds for regular income. About one third use the money to repay debt, such as a prime mortgage if they are retiring with an outstanding debt.

“It’s a very powerful mechanism to allow the retiree to maximise their cash flow in retirement if they are going into retirement with debt,” Hickey said.

Deloitte estimates about one in seven use the money for home improvements. Other common uses include buying a new car and taking a holiday.

SEQUAL executive chairman John Thomas said most retirees were conservative with their borrowings through reverse mortgages.

“We find with seniors they take what they need not what they can borrow,” Thomas said.

The average settlement amount was $71,000.

New reverse mortgages are only available to people aged over 65 years. The maximum loan to value ratios offered to 65 year olds is between 15% and 20% of the value of the home. The maximum LVR offered increases according to the borrower’s age. An 80 year old would be able to access more than 25% of the value of their property.

Hickey said lenders used actuarial models to determine the maximum LVR they would offer to people at each age. The maximums were low because there was no requirement for borrowers to repay the debt until they sold the property or passed away.

The lenders also provide a “no negative equity guarantee”.

“The lender wears all the risk ... If the value of the house should be less than the mortgage debt they cannot ask the borrower, estate or beneficiaries for any more money than the value of the home,” Hickey said.

While there is no requirement for people who take out a reverse mortgage to repay the loan until they die or sell the property, Deloitte’s research suggests that people typically repaid the loan in full after around seven or eight years.

A larger number of people repaid the loans in 2013 compared with previous years ($504 million discharges compared with $350 million in 2012).

Hickey said anecdotal evidence suggested that retirees with reverse mortgages had taken advantage of capital growth in the property market to sell their home at a profit and repay the loan.