Government to offer seniors reverse mortgage protection

The Mortgage and Finance Association of Australia says it supports draft legislation designed to offer better protection for senior Australians who use reverse mortgages to access the equity built up in their homes.

“We’ve been very much involved in the working group which was responsible for the changes announced.  We support them,” MFAA chief executive Phil Naylor has told Property Observer

Naylor says the proposals, released over the weekend by assistant treasurer Bill Shorten, are generally consistent with the code of practice set by SEQUAL, the industry body representing lenders who offer reverse mortgages.

The draft legislation offers statutory protection against the risk of negative equity, restricting lenders from asking seniors to pay more than the value of their home when it is sold.

The SEQUAL code of conduct requires that “all products carry a clear and transparent ‘no negative equity’ or ‘non-recourse’ guarantee. That is, the customer(s) will never owe more than the net realisable value of their property, provided the terms and conditions of the loan have been met.”

Members of SEQUAL include the Commonwealth Bank, BankWest, St George and Suncorp, which all offer reverse mortgage products.

The other key facets of the draft legislation are:

• Better disclosure of the financial consequences of entering into these types of contracts, so that seniors can better assess how accessing credit can reduce equity in their homes and limit their choices in the future
  
  
• New requirements on lenders before they act on a default – including an obligation to take reasonable steps to contact borrowers in person, make sure they understand they are in default and provide borrowers with an opportunity to rectify the default.

Reverse mortgages are typically offered to home owners aged over 60 and allow them to borrow money against the equity in their home, in return for a lump sum, line of credit or regular payment. 

The debt does not need to be repaid until the home is sold (usually when the borrower dies or voluntarily vacates the home), with interest compounding until that time.

The market has grown strongly in Australia over the last five years.

Research by Deloitte and SEQUAL, the industry body representing lenders who offer the products, found that the total value of reverse mortgages reached $3 billion by December 2010.

About 5,600 seniors took out a reverse mortgage in 2010, with the total number of loans rising to 41,600.

"Many senior Australians have worked hard to own their own home before retirement, and if they need to use credit to access the equity in their home then they deserve to be adequately protected," Shorten says.

"These measures deliver a new level of protection for seniors who take out reverse mortgages.  Reverse mortgages are different from other credit products and it is important the law takes into account their unique characteristics. With these new measures, older Australians can have greater confidence when using these products, and will be able to make better choices."

Older Australians, lenders who offer the products and other stakeholders have until August 17 to comment on the draft legislation.

Reform of reverse mortgages will be included in the National Consumer Credit Protection Act 2009.