Reverse mortgage lending and retirement
Since the global financial crisis, demand for reverse mortgages have grown steadily. It allows older individuals, perhaps retirees, to unlock the equity in their homes while they continue to live in the property.
However, reverse mortgages may not be all it’s cracked up to be. A recent review by ASIC found that borrowers had a poor understanding of the risks and future costs of their loan, inadequately documented long-term financial objectives, and lack of protection for non-borrowers who live in the property. When it comes to reverse mortgages, it may be a case of buyer beware.
Reverse mortgages are a credit product that allows older individuals to achieve their immediate financial goals by using the equity in their home to borrow amounts. The loan typically does not need to be repaid until a later time (ie when the borrower has vacated the property or has passed away). For older individuals who own their home but few other assets, the advantage of reverse mortgages is that it allows them to draw on the wealth locked up in their homes while they continue to live in the property. As good as it sounds, reverse mortgages may not be all it’s cracked up to be.
ASIC recently reviewed data on 17,000 reverse mortgages, 111 consumer loan files, lender policies, procedures and complaints, along with in-depth interviews with 30 borrowers and 30 industry and consumer stakeholders. The review evaluated the effectiveness of enhanced responsible lending obligations and examined 5 brands who collectively lent 99% of the dollar value of approved reverse mortgage loans from 2013 to 2017.
The average size of a reverse mortgage loan was found to be around $118,627 with an average home value of $632,598 (average loan-to-value ratio 26%). Borrowers typically took out reverse mortgages to pay for daily expenses, bills and debts, home improvements and car expenses. Unlike other loans, reverse mortgage borrowers had limited choices due to a lack of competition, with 2 credit licensees writing 80% of the dollar value of new loans from 2013 to 2017.
The review also found that borrowers had a poor understanding of the risks and future costs of their loan, and generally failed to consider how their loan could impact their ability to afford their possible future needs. In addition, it found reverse mortgages were a more expensive form of credit compared to standard variable owner occupier home loans with the interest rates typically being 2% higher and as no repayments are required, the interest compounds.
According to ASIC, lenders have a clear role to play and in nearly all the loan files reviewed, the borrower’s long-term needs or financial objectives were not adequately documented.
This is important as borrowers can never owe the bank more than the value of their property, however, depending on when a borrower obtains their loan, how much they borrow, and economic conditions (eg property prices and interest rates), they may not have enough equity remaining in the home for longer term needs such as aged care.
The other concerning finding by ASIC is that some reverse mortgages may not protect other residents in the home. For example, if a borrower vacates the property or passes away, the borrower or their estate can often only afford to pay off the loan balance of a reverse mortgage by selling the property. This can require non-borrowers still living in the home (ie a spouse, relative, or adult children) to move out unless the contract contains a “tenancy protection” provision allowing them to remain in the home for a period of time.
Only one lender in the review offered a limited option to include a tenancy protection provision in their loan contract which lasted for one year after the death of the borrower with certain conditions. Other lenders in the review would only protect non-borrower residents if they added their name to the loan contract. ASIC notes that under enhanced consumer protections, lenders must give potential borrowers a prescribed tenancy protection warning, which did not occur in a majority of the cases.
Thinking of getting a reverse mortgage?
If you think a reverse mortgage would suit your retirement needs, come and speak to us today to ensure that you get the full picture before you sign up to anything. We can help you understand all the terms and protections to make the most out of your retirement.