Reverse Mortgages
Reverse mortgage reassurance
Reverse mortgage products are fast growing into a means by which older Australians can afford to live a decent lifestyle.
This has led to the Senior Australians’ Equity Release Association of Lenders (SEQUAL) developing the SEQUAL Financial Planner Equity Release Program, which has been endorsed by the Financial Planning Association. The program is designed to educate financial planners as to the needs of Australians as they enter retirement and provide them with the tools to best advise their clients.
Reverse mortgages can seem like the easiest option for older Australians looking to finance their retirement but there are many things to consider and the decision should never be taken without consulting a fully qualified and independent financial advisor. Until now, there have been few advisors who fully understood the equity release market.
The initial series of workshops will commence in September 2008 and whether your financial planner has attended one should be taken into consideration before requesting advise on equity release products.
For more information, visit SEQUAL.
Reverse mortgage report
ASIC has captured the experiences of those who have taken out a reverse mortgage.
Reverse mortgage borrowers are generally satisfied according to our ASIC report. But it also found in a report called All we have is this house that the complexity of reverse mortgages and the fact that they are unlike any other financial product could be potential risk factors for future borrowers.
Many people are unfamiliar with what a reverse mortgage is and have difficulty budgeting for long-term with large credit available to them. Also, it can be tricky estimating how much equity might be available in the future.
The report also found that there is a general reluctance to anticipate the impact of declining health on their finances and children can put pressure on parents to lend or give them money through a reverse mortgage and this may be an inappropriate use of the loan.
ASIC says it’s important to know how much the loan is likely to cost you over time and to know the consequences should you breach a condition of the loan. It’s a timely reminder to remember that your financial needs might change over the next 10 or 15 years and to look forward more than 3 or 5 years.
ASIC believes reverse mortgages can be a useful product but warn people that they tend to have unusual features and there is a need to be vigilant with budgeting and planning to ensure you make the most of your reverse mortgage.
Reverse Mortgage Research
The Senior Australian Equity Release Association of Lenders (SEQUAL) has released findings of a report which indicate almost a doubling in the number of people taking out reverse mortgages.
The SEQUAL study revealed that the market has almost doubled in the past 18 months, that the average age of borrowers is 74 and that 45% of loans are taken out by couples, followed by single women with 40%.
There has also been an increase in the number of providers as well as an expansion in the avenues through which people can access reverse mortgages, as not only banks but also mortgage brokers and financial planners have become more active in the industry.
This highlights the importance of educating the newer players in the market about the unique characteristics of reverse mortgages. SEQAUL has launched accreditation standards this year as well as researching and approving the Mortgage Industry Association of Australia course for those newer distributors.
SEQUAL off some great information on their website.
Go there
Reverse Mortgage Training
The Senior Australians Equity Release Association of Lenders (SEQUAL) has announced a new certificate course which ultimately aims to reassure consumers by differentiating reverse mortgage providers and financial planners who work under the SEQUAL code of conduct.
The course will be mostly undertaken by mortgage brokers, who are the biggest distributors of reverse mortgages, and who are not regulated by legislation, though many financial planners are now also offering the products.
A reverse mortgage is a loan which uses the equity in your home to cover the amount borrowed. The loan is paid back only when the person moves from the home or when they die. There are associated risks with reverse mortgages, as with any credit arrangement, but if people gain legal advice, they can be a useful financial tool in retirement.
SEQUAL says that most Australian reverse mortgage products now come with a ‘no negative equity guarantee’, which protects the consumer from using up all their equity and going into more debt if interest rates rise and their property value drops. But consumers should be aware this guarantee can be waived if, for instance, home insurance payments are missed or other terms and conditions for maintenance of the home are not met. For more information on SEQUAL’s industry regulation and reverse mortgages, visit their website.
Go there
ASIC Reverse Mortgage Calculator
A reverse mortgage allows you to borrow money secured against your home, without having to pay back either the amount you borrowed or the interest due until you leave your home or die. Instead, your debt and interest builds up (or compounds) over time. They are generally restricted to senior Australians. You will generally be required to maintain and insure your home and pay your rates at your own expense. The number of these equity release products on the market has increased from three to 18 products in the last two years. ‘While reverse mortgages may provide a useful way to release equity in people’s homes, they involve significant risks and should be handled with care,’ ASIC’s Executive Director, Consumer Protection, Mr. Greg Tanzer said.
Before you take out a reverse mortgage, ASIC suggests you need to:
• get independent financial advice to help you decide whether the product is likely to be able to meet your needs now and in the future;
• ask an independent solicitor to check the contract and explain the fine print; and
• discuss your intentions with your family
The new calculator on our consumer website FIDO , at www.fido.gov.au shows how debt can build up and may affect how much of your home you still own as time goes by.
The FIDO reverse mortgage calculator shows the effect on the equity in your home based on decisions you may make about:
- how much you borrow;
- whether you take an initial lump sum, or arrange regular payments or a combination of both;
- how long you borrow for;
- interest rates and various fees; and/or
- changes in home values.
FIDO’s website has lots of tips on understanding equity release products (including reverse mortgages) and the questions to ask before you commit to one.
Go there
Accessing Housing Equity
The researchers also examined attitudes to releasing the equity tied up in property. One in four current or former owner-occupiers had accessed equity at some stage: most commonly by borrowing against the value of their property, or ‘trading down’ for a smaller, less expensive home. The main reasons given for releasing equity were home repairs and improvements, paying bills or debts and buying essential items. There were few examples of people releasing equity to pay for non-essential luxuries.
Although owner-occupiers tended to think equity release was a good idea in principle, Equity release schemes marketed by financial service providers were regarded as too complicated, risk and difficulty to understand. Only one in 20 home-owners said they would consider an Equity Release Home Reversion Scheme.
Reverse Mortgage or Home Equity Conversion
A good deal of the assets of Australians are in their homes. About 75% of older Australians own the home where they live and they owe very little or nothing on the property. With a reverse mortgage some of the equity in the home is converted into a lump sum or an income stream, whereby the homeowner receives a regular cash payment, until his or her death or the house is sold. Interest, fees and charges accrue until the loan is finally paid off with the sale of the house or from the borrower’s estate.
With a conventional home loan the regular payments reduce the principal (the amount owed) and the interest charges slowly fall as the amount owed falls. With a reverse mortgage there are generally no repayments against the amount borrowed and the interest is added to the loan so the loan size increases and so does the interest.
You may be able to repay part of the loan, such as the interest and other charges. This stops the debt increasing beyond the amount of the loan.
If you want regular payments but your finance institution offers only lump sum loans, you may be able to use the loan to buy an income stream product such as an immediate annuity.
Lenders
Several institutions now offer these loans. In December 2002 St.George Bank announced the launching of the Seniors Access Home Loan. In September 2003 the Commonwealth Bank of Australia introduced its Equity Unlock Loan for Seniors. State West Credit Society has the Reverse Equity Loan for their members who must be Western Australians.
The OFM Investment Group (formerly Over Fifties Mutual) offers a Seniors Home Equity Release Loan that is available to people over the age of 60 who wish to borrow against either their family home or investment property. OFM offers customers the choice of three interest rate options, as well as letting borrowers protect a proportion of the home under their Inheritance Protection Option.
Go there.
Bluestone Equity Release, part of the Bluestone group, have a product for property owners who are over 60. Their EQUITYtap product enables you to tap into the equity of your home or an investment property. The interest rate is fixed for the life of the loan.
These loans are for people 65 and over (63 for St George, 60 for EQUITYtap) and are secured against your primary residence. They cannot be secured against holiday homes or investment property (except EQUITYtap).
If you want to use your home as security for a loan then you could also investigate the Pensions Loan Scheme from Centrelink. This operates in much the same way as a reverse mortgage. Find out more.
Advantages
The reverse mortgage can appeal to those who have a substantial equity in their home but don’t want to move to a smaller and cheaper property, so unlocking some of their capital. However, the money can be used for anything: holidays, a car, family assistance.
Disadvantages
Against this advantage, note that you pay compound interest (that is, interest is paid on the interest owed) on the loan so if you live for a relatively long time you can end up with a considerable debt. For example, a loan at 7% compound interest will just about double in 10 years, so if you borrowed $40,000 you will owe about $80,000.
When considering any reverse mortgage you should be clear on who is liable for the loss if proceeds from the sale of the home is insufficient to cover the loan and interest.
Note also, as the interest rate is variable (except EQUITYtap) the amount you pay in interest might increase substantially. If the loan is taken as an income stream you only pay interest on the outstanding balance. If the loan is taken as a lump sum you pay interest on the whole amount.
Keep in mind too that later the equity in your home may be necessary to fund a move into an aged care facility or into another home more suitable to ageing conditions. After repaying the loan and its accumulated interest the capital remaining may be insufficient for the retirement home of your choice.
Of course, this type of loan will prevent your passing on the family home debt free. You may wish to discuss it with your family so they understand the consequences of a reverse mortgage. Perhaps they can suggest other arrangements.
Associated fees
Be aware that you have to pay to have the home valued initially and periodically thereafter. Also, there may be application fees, establishment fees, legal fees to the lender and on-going administration fees which are added to the loan so interest is also charged and compounds on these fees.
Possible effects on pension
If you use the money for spending and not for investing it is not regarded as income for pension purposes. If you take regular payments and you don’t save the money, then neither the income test nor the asset test will apply for pension purposes.
If part of the loan is unspent it is counted as an asset and will reduce the pension, possibly to the point where it cuts out and you will lose the benefits of the pensioner concession card, or the health care card. The first $40,000 is not counted as an asset for 90 days even if unspent but it is considered an asset after 90 days. If more than $40,000 is borrowed and not spent immediately then that part over $40,000 is instantly assessed as an asset. The amounts considered as an asset will be subject to deeming under the income test.
Get advice
Before committing to a home equity loan you should undertake a detailed analysis of all the ramifications, if you have the necessary expertise, or seek independent financial and legal advice.
If you are receiving a government pension, you should at least seek advice from a Centrelink Financial Information Service officer to determine how, if at all, the arrangement you are considering will affect your pension.
Further information
The National Information Centre on Retirement Investments Inc (NICRI) has a leaflet on reverse mortgages. Go to the NICRI website and click on the "Leaflets" box in the top right, and then on "Reverse Mortgages".
Also see the views of the Australian Securities and Investments Commission (ASIC). Among other things, note how the amount you or your estate owes grows substantially over time.
Reverse Mortgages by Richard Reed thoroughly examines the subject and associated issues such as the property market in Australia, the development of reverse mortgages in Australia and overseas, options to not taking a reverse mortgage, and more. You can buy Reverse Mortgages from the About Seniors bookshop.
Looking after the family home
Call it a home equity release, reverse mortgage, whatever - the latest version comes from Bendigo Bank, and is called Homesafe. But how can you be sure how safe a home equity loan really is? These products urge older Australians to take equity out of their home to pay for current expenses. The good news is that some of the financial companies offering such products have formed a not-for-profit member organisation called Senior Australian Equity Release Association of Lenders (SEQUAL) to encourage the industry to develop in an ethical manner. Founding members include Bluestone Equity Release, St George Bank, Australian Seniors Finance and OFM Investment Group (formerly Over 50s Mutual). Consumers can access information about SEQUAL approved lenders, their code of conduct, and equity release loans at the website www.sequal.com.au
