Currently over $500 billion of Australia’s home equity is held by individuals and couples aged over 65, with about 70% of older Australians owning their homes outright, yet a shrinking proportion of older individuals and couples are capable of enjoying a comfortable income in retirement as they are asset rich and income poor and often do not qualify for a full aged pension.
An industry has sprung up to cater for this demand offering reverse mortgages. These are loans based on the value of a person’s real estate property, usually the family home.
There are two versions of reverse mortgages. Firstly, the Commonwealth Government’s pension loans scheme. This now allows a person to borrow against the security of real property to top up a pension to 150% of the aged pension and is paid fortnightly. The Commonwealth charges 5.25% interest which is compounding, so the longer you have the loan the more is repayable to the government. Often this loan would be a claim against the estate of the person taking out the loan.
The second version is a commercial reverse mortgage from a bank. The loan may be taken as a lump sum, a line of credit, an income stream, or some combination. Interest is compounding, typically at a variable rate and is 1% to 2% higher than a standard home loan. As the average variable rate is currently around 5.38% (August 2018), adding another 1% or 2% makes these loans quite expensive.
In 2012, the Australian Government introduced additional protection to help consumers make more informed choices about commercial reverse mortgages to protect them from potential harm. For example, no repayments are required while the borrower lives in the home. The loan must be repaid in full when the borrower vacates their home, moves into aged care, sells their home or dies. The borrower cannot owe more than the value of the home when it is sold.
The major issue with reverse mortgages is that the interest charges that accrue over time can reduce the capacity of these borrowers to afford important expenditures, such as aged care accommodation in later life. This risk is compounded if home loan interest rates rise and/or the value of residential property falls.
Whilst the availability of reverse mortgages has allowed older Australians to improve their lifestyle in retirement, ASIC’s recent review of reverse mortgages found there was poor understanding of the risks and future costs of such loans.
The Commonwealth Bank and its subsidiary Bankwest are the largest providers of reverse mortgages and ASIC found that they had a “tick a box” attitude to eligibility with limited attention being paid to a borrower’s future needs.
There is some stigma around reverse mortgages but they can serve a valuable service when, for example, a widowed partner has a share in an estate less than the value of the house he or she is living in, or the house is the only asset they have. In these circumstances a reverse mortgage can ensure an ongoing decent living for the borrower.
ASIC: REPORT 586, Review of reverse mortgage lending in Australia, August 2018
AFR: ASIC warns CBA on reverse mortgages, 29 August 2018