Is a reverse mortgage risky business?
When the prospect of including the family home in retirement incomes was raised this week by the Centre for Independent Studies, there were two notable reactions.
The first came from members of the public, in letters pages, online and on radio, filled with anxiety and outrage that equity in the family home be used to help fund retirement.
The second was the noncommittal response from the government. Just last week, the Prime Minister couldn’t respond quickly enough to rule out the smallest changes to negative gearing rules.
The family home has always been a sacred cow for politicians. A spokeswoman for the Treasurer yesterday said the government had no specific response to the CIS research, but was “happy to look at everyone’s submissions”.
The current generation of retirees, who have had the good fortune to reap the gains of a 25year bull market in housing prices and seen the value of their homes rise five or tenfold, are asset rich and income poor. They draw heavily on government pensions and then pass the wealth in the home on to their older, adult children.
The proposal from the CIS is to convert home equity into an annuity payment that provides income, via a reverse mortgage scheme. The Murray review included a similar plan.
The CIS research says about 80 per cent of retirees own their own home, most have paid off their mortgages, and about 70 per cent of their wealth is tied up in the family home.
As it turns out, the federal government does already offer a type of annuity product through a scheme that almost no one has heard about called the “Pension Loan Scheme”.
It works in the same way as a reverse mortgage, by paying fortnightly instalments and charging lower interest rates than the banks. At present, it’s restricted to people who don’t qualify for the pension, the debt is secured against the house, and repaid on death.
Introduced by the Hawke government at the same time as the assets test for the pension, it has been dogged by very low takeup rates, perhaps because it only allows access to an income stream equal to the full pension, which isn’t enough for the baby boomer generation to maintain their lifestyles.
Any suggestion that retirees will need to draw on the equity in their homes needs to involve the government either running the scheme or heavily regulating it. Banks should be kept well away and the recent financial advice scandals underscore that.
You need only to look at the experience of aged pensioners in the US to understand why. Described as the “ugly stepchildren” of the homelending industry, reverse mortgages are hawked in cheap ads on latenight TV and are seen as an expensive last resort for retirees desperate for cash.
Even though the products are federally insured and monitored by consumer protection agencies, financial institutions have used reverse mortgages to exploit older people with expensive, highly
onerous terms that often understate the costs and risks of the products. Does this remind anyone of the last subprime mortgage crisis?
Even in Australia, there are occasional reports of pensioners being pressured by a lender to borrow more than they wanted to, and being unable to repay the loan early via a sale of the home because of prohibitive break fees of over $200,000.
At present, just 1.1 per cent of retirees have a reverse mortgage. Because the market is so small, the industry doesn’t have proper securitisation or derivatives in place to spread risk either.
The CIS has urged the government to legislate for a reverse mortgage scheme, which could help to minimise exploitation concerns. Another thinktank, the Australia Institute, has argued for an expansion of the existing Pension Loan Scheme.
One of the legitimate concerns is that if the mortgage is drawn down from, say, the age of 65 to the mid80s, will there be enough equity left to fund the move into a nursing home, which requires a mysterious upfront payment or “bond” of several hundred thousand dollars?
The Council of the Ageing supports an equityrelease program, but says it needs to be part of a broader review of pensions, superannuation, taxation and paying for aged care. “All those levers interconnect,” says the council’s chief executive, Ian Yates.
“At the moment the equity release market is very clunky, it’s very expensive, and most people don’t want to go near it because of those things,” he says.
Given the poor reputation of such financial products, weighed up against the $42 billion pension cost to the budget and the ageing population, the government would have to tread very carefully to ease public concerns.
Source URL: http://www.businessspectator.com.au/article/2015/4/30/nationalaffairs/reversemortgageriskybusiness