Reverse Mortgage Loan Blog

Australia’s reverse mortgage market has ballooned in the past 12 months to be worth $1.8 billion and is likely to keep growing as baby boomers look to fund a more comfortable retirement.

Reverse mortgages allow retirees to borrow against the equity in their home.

The loan, plus interest, is usually paid back at once when the borrower sells the house – either when they move into a retirement home or die.

The first reverse mortgage was issued in Australia in 1986 by Advance Bank before it was bought by St George Bank Ltd, which is now a major player in the market.

Present day concerns about the adequacy of Australia’s retirement savings have triggered an explosion in the use of reverse mortgages.

According to Trowbridge Deloitte, there were 31,500 reverse mortgages in Australia at June 30, with a combined loan book of $1.8 billion, up a 67 per cent at June 30,2006.

The average loan size increased to $57,350 from $54,000 since December 2007, with 85 per cent of the loans on a variable interest rate.

Trowbridge Deloitte partner James Hickey said market penetration for reverse mortgages was still low.

“We estimate that only 1.25 per cent of the population of households over 60 actually use a reverse mortgage, which is a relatively low penetration rate,” he told reporters.

“If it were to increase to five per cent … then obviously there would be quite a strong impetus to meet the growth in demand.”

Still, the rise of the revere mortgage has not come without its hiccups.

Growth in the first half of fiscal 2007 was slower than in the last half of fiscal 2006, largely because of an increase in interest rates.

Falling property prices in NSW didn’t help either, said Senior Australian Equity Release Association of Lenders (SEQUAL) head Kieren Dell.

The worst case for people taking out a reverse mortgage is falling property prices combined with rising interest rates.

Higher interest rates make the loan more expensive, and a lower property price means they will end up with less money to pay for it.

The proportion of reverse mortgages in NSW fell to 31 per cent of the total national revers mortgage market at June 30, from 40 per cent six months before.

“What that probably says is that these are products that people use when they’re more confident, much like traditional mortgages,” Mr Dell said.

Mr Dell and Mr Hickey said that NSW’s hold on the market was probably diluted by the products catching on in other states.

And the credit crunch isn’t likely to do much damage to the industry because most of Australia’s reverse mortgage providers fund loans from their balance sheets or bank loans.

BlueStone Group, which recently had to raise rates on its traditional mortgage products, is the only reverse mortgage provider to securitise part of its loan book.

“I don’t think that’s going to be an issue for them,” Mr Dell said.

“They also get funding from Barclays (Bank) and Westpac.”

Westpac Banking Corporation Ltd and National Australia Bank Ltd are the only major banks that don’t offer their own reverse mortgages.

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