Reverse Mortgage Loan Blog

DESPITE signing up to more than $1.8 billion in reverse mortgages, most borrowers do not understand how their loans work, don’t know how the interested is calculated and think it is like a credit card.

According to a new survey, these elderly borrowers face considerable future risk, mainly because they don’t understand their contracts and the consequences of defaulting.

After receiving such a large amount of money they also spend a lot of it upfront, leaving little or nothing to live off. Many borrowers treat the loan like a credit card which they could draw on any time.

The survey by investment watchdog the Australian Securities and Investments Commission also found many people were taking out reverse mortgages because they had been encouraged to do so by their children and then they spent the money on those children, sometimes inappropriately.

ASIC executive director of consumer protection Greg Tanzer said “very few” reverse mortgage borrowers realised the serious consequences of not meeting their loan conditions and obligations.

“Many did not know how much the loan was likely to cost them over time and more than half did not know what would happen if they breached a loan condition,” Mr Tanzer said.

“Some borrowers had difficulty budgeting. One borrower with a reverse mortgage said it was like having a credit card with a $100,000 credit limit and no repayments.

“Several borrowers commented about how difficult it had been to resist the constant availability of credit.

“A small number were already expressing regret about how they had used their reverse mortgage and how quickly they had exhausted the funds they had borrowed,” he said.

A reverse mortgage is a loan where people — mostly elderly — borrow money against the equity in their home. The loan and interest is not repaid until the home is sold.

There are about 31,000 reverse mortgages valued at about $1.8 billion in Australia. They are one of the fastest growing financial products.

The report included recommendations to the lending industry to improve information and advice for consumers.

“While reverse mortgages can be a useful way for older people to access the equity in their homes, the products have significant risks,” Mr Tanzer said.

“In the right circumstances a reverse mortgage might assist an older person. However, these products have unusual features. People should think carefully about their situation before using an equity release products,” he said.

Consumer group CHOICE has called on the government and ASIC to introduce tougher national legislation.

Reverse mortgage lobby group SEQUAL called on ASIC to continue to help build up financial literacy amount senior Australians.

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