Reverse Mortgage Loan Blog

As retiree numbers grow, many still grapple with the challenge of finding a way to bridge the gap between the life they want in retirement and the lifestyle their retirement savings can afford.

A SEQUAL-RFI (Senior Australians Equity Release Association of Lenders /Retail Finance Intelligence) reverse mortgage study was recently conducted to better understand retirees’ attitudes towards reverse mortgages. One thousand over-60s were interviewed, including both the baby boomer and “builders” generations.

The research showed that despite a third of retirees planning to sell their family home to fund retirement, many were unsure what options were available to them to release equity from their home.

Many were reluctant to take out a reverse mortgage due to the disadvantages regularly explained in the press.

The research showed most retirees felt independent legal and financial advice should be compulsory before obtaining a reverse mortgage. Yet according to the last SEQUAL/Trowbridge Deloitte reverse mortgage study, only 9 per cent of reverse mortgages were organised by financial planners (although this was up from 2 per cent a year earlier).

The lack of financial education about the product is holding senior Australians to ransom in their retirement and many are settling for the downsizing option without considering all the financing options first.

There are heavy economic as well as social costs associated with selling a home and retirees should be able to rely on professionals such as financial planners to inform them on the pros and cons of all financing options.

Interestingly, the survey found that only $300 a month would improve the lifestyle of 50 per cent of retirees, and almost 60 per cent require less than $500 a month. Though downsizing may be the best option for many, for others it would be ludicrous to sell their home to finance only an extra $4000 to $6000 a year when there are other options available to them, such as reverse mortgages, which don’t involve giving up an asset they spent so long to build. And, the act of selling and buying could equate to 5 per cent of capital. (That said, with rising interest rates, that extra $4000 to $6000 a year in extra income from a reverse mortgage would cost the retiree much more because home equity would be eaten up faster. Sums must be done on a case-by-case basis.) A well-structured reverse mortgage that pays retirees in instalments can provide peace of mind and a real solution for cash-strapped retirees. This is where financial planners can really add value. Reverse mortgages must be considered as a way to make an illiquid investment, the family home, into a liquid one — it allows the retiree to “sell the spare bedroom”. The role of planners should also be to enlighten retirees on the economic ramifications of downsizing of which retirees may not be aware — such as agents’ fees, stamp duty and legal fees associated with selling and then purchasing a new home. Additionally, the extra income earned from the sale of the old property could affect the retirees’ government pension.

Financial planners have a role to play in difficult economic times. Just as it is important for planners to help their clients with investments when markets are volatile, it is also important for them to talk to their clients about issues such as rising interest rates.

There are many strategies with reverse mortgages that can be used to protect borrowers from the effects of rising interest rates. These include the obvious tactic of fixing the interest rate, possibly even for life, or quarantining some of the property value.

Contrary to popular belief, a reverse mortgage strategy is not “set and forget” but requires the financial planner to continually review the client’s situation.

Not surprisingly, the SEQUAL-RFI study found that nearly 80 per cent of Australians aged 60 and over had heard of reverse mortgages but as few as 40 per cent understood the basic premise of the product.

Many senior Australians feared myths and misconceptions about reverse mortgages, including falsely believing they would lose their home title or pension benefits.

In fact, it is simple to structure a reverse mortgage to ensure no effect on their pension benefits.

Some 28 per cent of seniors held the incorrect belief that a reverse mortgage involved selling a portion of the house to the bank in exchange for money, or that the loan involved compulsory repayments until the borrower passed away.

SEQUAL has developed an accreditation course that planners can complete to assist them to understand reverse mortgages. It is important that financial planners have a complete tool box of options for their retiree clients, and that they understand how reverse mortgages work and in which situations they can work.

Financial planners’ advice will also help the Government in its aim to educate retirees on changing the “asset imbalance” faced by most retirees.

About 60 per cent of retirees’ wealth is held in property assets, mostly the family home, and many hold little cash wealth to fund their day-to-day living.

In fact, the SEQUAL-RFI study found 60 per cent of over-75s had no superannuation savings. Neither did 19 per cent of 60- to 64-year-olds.

In fact, 25 per cent of retirees had no idea how much income they would need to fund their retirement lifestyle and future healthcare costs.

Again, planners can play an important role in advising retirees how to structure a reverse mortgage to fund their current and future costs.

Even where the retiree does have super, planners must consider the impact on existing retirement-income plans when clients need a lump sum, perhaps for a medical emergency or house renovations. Reverse mortgages can be useful in such circumstances, and are not only an option for those with no other choices.

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