Reverse Mortgage Loan Blog

RETIREES feeling the pinch from rising inflation and high interest rates could access a little-understood credit stream.

Several financial planners suggest the under-utilised product, called a reverse mortgage and designed solely for the over-60s, could help the growing “grey army” who are home owners to supplement their incomes.

But other financial advisers warn there are pitfalls.

Reverse mortgages allow people to borrow against the value of their homes – either in a lump sum or in instalments.

The customers do not need to make any repayments on the loans until their homes are sold, they move into retirement accommodation or after their death.

In the meantime, the loans continue to accrue interest, again offset against the value of their properties.

The amount that a retiree can borrow is tied to their age.

At 60, most borrowers will be able to access up to 15 per cent of a property’s value. By 80, people could borrow up to 50 per cent.

In a climate in which disposable income is at a premium, reverse mortgages are being pushed as one possible panacea to the credit crunch.

Some customers are taking out reverse mortgages to cover home renovations or unexpected medical expenses.

Others are using them to fund new cars, caravans or overseas holidays.

And the reverse mortgages are also being accessed to supplement elderly couples’ or individuals’ weekly incomes, as the funds can be drawn down a little at a time.

While the product is still only utilised by a small proportion of the population, it has grown dramatically in its popularity over the past few years.

The market for the products, which was worth $848 million at the end of 2005 passed $2 billion at the end of last year.

This growth saw the number of loans jump from more than 15,000 to more than 30,000 in the same period.

Kieren Dell, chief of the reverse mortgage industry body called the Senior Australians Equity Release Association of Lenders (SEQUAL), said demand was high.

“High inflation is putting a lot of pressure on the elderly, who are surviving on the pension, many of whom are racking up debts on credit cards.” he said.

“Reverse mortgages are most applicable to people who are asset rich, but cash poor. They let people use part of the value of their house to improve their living.”

Darren Moffatt, chief of reverse mortgage broker Seniors First, said mortgage stress was also driving demand.

“We see a lot people coming to us who still owe money on their house and who are struggling to pay it off on the pension,” he said. “Often we can refinance that debt into a reverse mortgage so that no regular repayments are required.”

But while the industry is spruiking the new loans, many financial advisers urge caution.

According to the Australian Securities and Investments Commission, the loan could possibly affect the pension.

ASIC also warned the interest rates charged on reverse mortgages were usually higher than average home loan rates.

And, experts have warned that because the interest compounded over the term of the loan, the debt could end up being more than the home is worth. This is called negative equity.

While all SEQUAL members must offer a “no negative equity guarantee”, preventing them recovering the difference between the loan and the value of the property, ASIC has warned that not all providers (non-SEQUAL members) offer this protection.

They have also warned that these guarantees could sometimes be lost if the customer did not repair and maintain their home to a standard set by the lender.

These concerns are shared by consumer watchdog Choice, which has raised concerns that brokers are pushing elderly consumers into borrowing more than they need.

Mr Dell said that those thinking about reverse mortgages should go only to a mortgage lender who was a member of SEQUAL because they were bound by a code of conduct.

Customers should also make sure they received good advice, he said.

“Look for a planner that we have accredited because they have been through our education program,” he said.

“It is also a requirement of SEQUAL that every consumer get independent legal advice.”

Recently, there has been a blip in the growth of reverse mortgages, as a result of the credit crunch.

According to financial analysts CANNEX, no new reverse mortgage products have been created in the past six months, while several players have left the market.

James Hickey, a partner with actuaries Trowbridge Deloitte said the slowdown was related to supply, not demand.

“It’s closely linked to funding issues in the broader marketplace,” he said. “If they can’t get the funds, they can’t offer the loans.”

Mr Moffatt believed the slowdown would be temporary.

“Growth will come back in the second half of this year for two reasons,” he said.

“Firstly because interest rates will come down and secondly because a wave of baby boomers will start to enter the target market in early 2009.”

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