Equity-rich, cash-poor retirees have literally been given a new lease of life with the development only a few years ago of a market in this country for reverse mortgages. For many Australians, the residential family home is their main asset but sometimes additional money is needed to renovate, fund an overseas holiday or to simply live on. Short of selling the home and moving in to something less expensive, the answer can be a reverse mortgage. In a simplistic explanation, reversing your mortgage is another way of re-mortgaging your home but this time, the financial institution gives you the money and you are not obliged to make any repayments until you leave and move into care, sell your home or die. When the loan ends you, or your estate, must repay what’s owing from the proceeds of the sale of your home.
There are many reasons a reverse mortgage appeals and the market has now evolved into a $1.81 billion product sector which has grown no less than 67% in the last 12 months alone. It is predicted the reverse mortgage market will boom even further in the near future, thanks to a large group of baby boomers edging closer to retirement. CANNEX has watched the introduction and growth of reverse mortgages with interest and has now evaluated all reverse mortgages available in Australia and ranked them by star ratings in order to help the consumer choose the right product for them.
In the past reverse mortgages have been somewhat contentious because of the potential for vulnerable retirees to be given incorrect or ill-informed advice. This has been addressed by the regulators, ASIC, Australian Securities and Investment Commission and SEQUAL, Senior Australian Equity Release Association of Lenders which formed two years ago and is supported by leading providers of equity release products. However, before deciding on a reverse mortgage, all consumers should seek out independent legal and financial advice to walk through your intended beneficiaries, pension and other implications of this product.
SPENDING THE KIDS’ INHERITANCE
The popularity of reverse mortgages can suggest a new-found, free-spending attitude by the “oldies” but it is more likely to be a case of parents wanting to fund all aspects of their retirement without bothering their children. According to a recent SEQUAL/Trowbridge Deloitte study1, there are currently 31,500 reverse mortgages in Australia, 80-85% of which have been drawn down as a lump sum with the remainder being used as an income stream. Couples are the most common borrowers and although this product has been designed for people aged 60 and upwards, the average age for new borrowers is 73.
Careful consideration needs to be given to the long-term effects of a reverse mortgage. Will you have enough money after the sale of the property to fund aged care accommodation? Some products do allow you to protect a fixed percentage of the value of the property so it cannot be used to repay the debt. If leaving money to your children is important, there is now a “Protected Equity” feature available from six providers. Interestingly, 10% of existing reverse mortgage borrowers repaid their loans in full so there are obviously various uses for this product as a financial tool for the retired.
As with other, more traditional mortgages, cost remains the biggest consideration. Interest is capitalized every month so the borrower should expect compounding effects on their loan. For example, a $50,000 loan will grow to over $120,000 after 10 years so interest rate is crucial, as even a half a percent can make a big difference over the life of the reverse mortgage. There are options available to reduce loan growth. Drawing the balance progressively is one way and most lenders offer this facility. Fixed interest rate for life, offered by five lenders, is another option which ensures stability of cost throughout the year. Capping the variable rate, as one lender does, gives the borrower a guarantee that the interest rate will never exceed the initial agreed rate.
CANNEX notes lenders are currently offering variable interest rates between 8.70% and 9.32%. Fixed interest rate for life ranges from 8.59% to 8.99%. With a reverse mortgage there are other fees and charges which can apply. Some lenders do not insist on an ongoing property valuation, others value the property every two years and charge $220 for this. Upfront costs for a loan of, say, $50,000 range from $550 to $1,290, and ongoing fees range from zero to $15 a month.
The ultimate nightmare for retirees is to get to the stage where the value of their property does not cover the loan total and they are evicted, as a result. This scenario will remain just a bad dream providing borrowers stick to quality products that offer a No Negative Equity Guarantee. CANNEX, along with ASIC, SEQUAL and consumer watchdog Choice, feel this feature is mandatory, so much so that we do not include any reverse mortgage without this feature in our star ratings.
Basically, No Negative Equity Guarantee means that the loan will never exceed the value of the property. It is a form of protection for borrowers to ensure they will not have to sell the property in their lifetime and that they can never bequeath debt to their family or other beneficiaries. Of course, as with any financial product, you need to be aware of conditions that may void this agreement such as failing to pay the rates, insure the home or maintain the home to a certain standard. SEQUAL’s code of practice goes one step further and now contains minimum contract requirements to ensure that No Negative Equity Guarantee stands in all cases, except where a borrower has been fraudulent or willfully damaged the property or has tried to sell the home without the approval of the lender. These changes must be made by all SEQUAL members by January 2008 and this adds a powerful layer of protection to borrowers.
TWO LENDERS STAND OUT
CANNEX’s first-ever reverse mortgage star ratings evaluated 17 lenders who offer 55 reverse mortgage products. Our extensive research resulted in only two of these lenders being awarded five stars for superior products. CANNEX firmly believes that while an interest rate must be competitive, it cannot be the only criteria by which to judge the merits of a reverse mortgage. The features the products contain are just as important to the targeted consumer and it is these features which have seen ABN AMRO and Bluestone cross the line ahead of the others.
Both companies offer six variations of their reverse mortgages, all with Protected Equity written in. ABN AMRO’s suite covers variable rate, fixed for life, as well as four separate fixed term loans. Bluestone, on the other hand, offers variable capped interest rate loans with different pricing structures for lump sum drawdowns and instalments. The finer points of difference can be studied in the results. Our methodology, too, is explained in detail in the document at the end f the results.The product should also be obtained and considered before making any decision about whether lease refer
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