The pitfalls of reverse mortgages

By Leith van Onselen

Reverse mortgages have yet to take-off in a big way across Australia. This is partly due to the generosity of our aged pension system, which largely excludes the owner-occupied home from the assets test, as well as the relatively high threshold placed on financial assets.

Nevertheless, the Australian Securities and Investment’s Commission (ASIC) has today published a review of reverse mortgage lending, which highlights the risks to borrowers that exhaust their home equity long before they die. Here’s Martin North’s summary:

ASIC’s review of the reverse mortgage industry highlights that some taking a reverse mortgage could face financial difficulty later in life. This despite the fact that borrowers can never owe the bank more than the value of their property, and can remain in their home until they pass away or decide to move out.

Thus, while this type of finance may assist older home owners (70% aged 55-85 own their own home), they face the dual risks of compounding effects on the original loan value as interest is rolled up…

… and significant risks should home prices fall, leading to loss of all or most capital.  63% of borrowers may end up with less equity than the average upfront cost of aged care for one person by the time they reach 84.

Plus there is limited competition, as just 2 credit licensees wrote 80% of the dollar value of new loans from 2013 to 2017.

And here’s the key extracts from the ASIC paper:

A review by ASIC has found that reverse mortgages are allowing older Australians to achieve their immediate financial goals – improving their lifestyles in retirement – but longer-term challenges exist.

For older Australians who own their home with few other assets, a reverse mortgage can allow them to draw on the wealth locked up in their homes, while they continue to live in their property.

ASIC reviewed data on 17,000 reverse mortgages, 111 consumer loan files, lender policies, procedures, and complaints. We also commissioned in-depth interviews with 30 borrowers and consulted over 30 industry and consumer stakeholders.

The review found borrowers had a poor understanding of the risks and future costs of their loan, and generally failed to consider how their loan could impact their ability to afford their possible future needs. Lenders have a clear role to play here and need to do more: for nearly all of the loan files we reviewed, the borrower’s long term needs or financial objectives were not adequately documented.

Importantly, under legal protections in place since 2012, borrowers can never owe the bank more than the value of their property, and can remain in their home until they pass away or decide to move out. However, depending on when a borrower obtains their loan, how much they borrow, and economic conditions (property prices and interest rates), they may not have enough equity remaining in the home for longer term needs (e.g. aged care).

ASIC Deputy Chair Peter Kell said “Reverse mortgage products can help many Australians achieve a better quality of life in retirement.”

“But our review shows that lenders and brokers need to make inquiries that would lead to a genuine conversation with customers about their possible future needs, not just a set of tick boxes on a form.”

ASIC’s report also finds that there is an opportunity for lenders to reduce the risk of elder abuse. Under the new Code of Banking Practice, recently approved by ASIC, banks will be required to take extra care with customers who may be vulnerable, including those who are experiencing elder abuse.

Consumers also had limited choices for finding a reverse mortgage. Several providers withdrew from the market after the global financial crisis. From 2013 to 2017, two credit licensees provided 80% of the dollar value of new loans from 2013 to 2017.

Background

Reverse mortgages are a credit product that allows older Australians to borrow using the equity in their home. The loan does not need to be repaid until a later time, typically when the borrower has vacated the property or passed away. They are a more expensive form of credit compared to standard variable owner occupier home loans; the interest rates are typically 2% higher and, as there are no repayments required, interest compounds.

Consumer demand for reverse mortgages has grown gradually since the global financial crisis, with the total exposure of ADIs to reverse mortgages increasing from $1.3 billion in March 2008 to $2.5 billion by December 2017.

ASIC commenced a review of lending practices and consumer outcomes in the reverse mortgage market to proactively examine issues that might emerge for older Australians.

As part of this review, we evaluated the effectiveness of enhanced responsible lending obligations for reverse mortgages which were introduced five years ago into the National Consumer Credit Protection Act 2009 (National Credit Act).

This review examined five brands, who collectively lent 99% of the dollar value of approved reverse mortgage loans in 2013-17. These brands were: Bankwest, Commonwealth Bank, Heartland Seniors Finance, Macquarie Bank and Westpac (comprising St George Bank, the Bank of Melbourne and BankSA). As of late 2017, Macquarie Bank and Westpac are no longer providing new reverse mortgages.

The May Federal Budget expanded the Pension Loan Scheme (PLS) to allow all retirees to obtain a state run reverse mortgage.

Thus, there should be less incentive for Australians to seek a reverse mortgage with a commercial lender going forward.

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Comments

  1. yeah i’m ignorant, what is a reverse mortgage and how does it work? do you live in the house that’s being reverse mortgaged, or does somebody else get it?

    • Live in and but when/if you sell – you have to pay the bank back, or, if you die, well – it’s someone else’s problem, namely your kids..

      Not sure if there’s other f*ckery about upkeep/maintenance and all that.

      In my view a recipe for potential disaster targeting the “cash-strapped, asset rich” boomers, considering the general levels of financial numeracy.

      In other words – how to leave a nice sloppy turd in your will for your kids to love you even more.

    • Basically, it’s a mortgage the same as any other, but instead of drawing down the whole amount at the start, you withdraw as you require it, with no requirement to pay until disposal of the house, when the interest + your spending has most likely eaten the whole value.

    • Can somebody actually explain in simple terms what a reverse mortgage is? Let me give you an example.

      A mortgage is when the bank lends you money to purchase a house. You have to provide a deposit up front and then pay back the rest of the amount owing, plus interest over the life of the loan, usually 30 years.

      A reverse mortgage is …

      • oh wow bjw678 replied as I was typing my message, pls disregard, thanks for the explanation bjw.

  2. I think one other issue is that it regulation around getting advice on reverse mortgages is tricky. They aren’t a financial product so a financial advisor can’t give you advice about it. Instead you need a credit licence which is less common. And there are pension and social security related aspects as well.

    And it’s different again with the PLS!

  3. It really usually comes into play when the last parent needs to go into residential aged care. Instead of selling the house to lodge the nursing home bond, you refuse to pay the bond and negotiate an accommodation fee with the nursing home. If the kids don’t have ready cash flow they take out the reverse mortgage to cover the accommodation fees instead of selling the house to lodge the bond. The kids either particularly want the house (it’s especially valuable, it’s at the coast and they love it, etc.) or they’re just taking a punt they’ll come out ahead on that deal.

    • I seem to recall that the discount implicit in paying the RAD upfront rather than pay it in arrears as a DAP is greater than the interest rate on the Reverse Mortgage.

  4. Will we be seeing hordes of reverse mortgage prisoners (a kind of ghastly end-of-years reflection of mortgage prisoners) when values drop? People who’d like to go into aged care but can’t afford to pay for it because the equity they thought they were going to do it with has vanished.

  5. There’s some rather sad stories coming out of Bluestone’s Reverse Mortgage product (click on 1 star reviews) at https://www.productreview.com.au/p/bluestone-mortgages.html

    It appears a lot of people locked themselves into ‘fixed rate for life’ reverse mortgages at rates of 7%pa and 8%pa back in 2006 and 2007. Normally if you don’t want your reverse mortgage anymore you pay it out, but as these are fixed rate mortgages, the company behind this product are gouging a massive break fee due to interest rates falling in the past decade. While there is a ‘no negative equity clause’ people who took out a small amount say, $30k now owe $100k+ due to time and interest rates (this is normal and i see nothing wrong with this part) but they would have to fork out another $100k+ if they wanted to repay the whole loan due to ‘breaking’ a fixed loan. Apparently the only way to avoid the break fee is to die or move into a nursing home (mortality or morbidity).

    I don’t have a problem with reverse mortgages and i do think they should be used to instead of asset millionaires living off the public pension, however in this case someone at the Royal Commission needs to step in and not only investigate this gouging but to ban fixed rate reverse mortgages.

  6. When millionaire pensioner home owners die, they should have the value of their pension payouts extracted from the value of their home when it is sold.

  7. If the property falls below the value of the loan, do they get to kill the people and collect the insurance?

  8. Report Finds Sharp Rise in Older Women Experiencing Homelessness | PBA

    https://probonoaustralia.com.au/news/2018/08/report-finds-sharp-rise-older-women-experiencing-homelessness/

    Older women experiencing homelessness has risen 31 per cent since 2011, according to new research.

    The report, “Retiring into Poverty”, released by the National Older Women’s Housing and Homelessness Working Group, said systemic factors such as lower superannuation, unequal pay and forced time off to raise children were key factors of the increase.

    The Working Group was lead by the Mercy Foundation, and consisted of a number of housing and homelessness policy leaders, researchers and practitioners.

    CEO of the Mercy Foundation, Felicity Reynolds, told Pro Bono News the combination of women having a lower overall income and housing affordability in major cities was a cause of great instability. … read more via hyperlink above

    • That’s me, waiting for this to happen,unless I get into a home (probably at Gold Coast where I can afford one) before I lose the ability to qualify for a mortgage due to ageing.

      I’ll have only an immigrant’s 12 years of super accumulated, and will be one of those great unwashed renters. I have no living relatives and no long term friends here, being an immigrant who’s only been here a handful of years.

      I currently have the money to support a mortgage payment, but NOT the money to support a rent payment PLUS savings toward a deposit, particularly at the savings rates required to replace what it cost me to recover from an injury from terrible sleep dep from light rail pre-works (see https://www.macrobusiness.com.au/2018/08/sydneys-light-rail-farce-hits-new-lows … it hit residents very badly as well… I estimate it’s cost me at least $81K provably, and more than that that I cannot substantiate because when you are so sleep deprived that you don’t understand how to obey walk signals, stay awake at your desk, or remember what your network password is, you’re also not good at keeping receipts.)

      I wish to hell that there was a hardship program to help people like me “get in”, even if it’s a zero or very low interest govt loan to be paid back with my super upon retirement. I’ve run the numbers and with current policies that are in place, I’d end up ahead AND with a roof in my old age. In short, it would secure my safety and keep me from being homeless.