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As Australians experience increased longevity and healthier lifestyles in their later years, financing a longer life is becoming a bigger issue. In the next four decades, younger generations may also be financially burdened by supporting this ageing population. In response to this shift, a surge in demand for home equity financing is emerging, presenting a potential avenue to mitigate these challenges
Sponsored by Household Capital
A WORD FROM HOUSEHOLD CAPITAL
Household Capital has partnered with The Adviser to help increase awareness of this retirement solution for ageing customers and brokers wanting to expand their service.
Household Capital is an Australian-owned independent retirement funding provider founded in 2016 with the aim to help retired Australians “live well at home”.
Through our Household Loan, we offer credit in retirement, a responsible, sustainable, and flexible financial solution that allows retirees to bundle their superannuation savings, equity in their home, and their age pension to achieve their retirement goals while continuing to live at home.
It is anticipated that 2023 will be the largest year of home equity retirement funding in Australia’s history, forecast at over $750 million. It’s Household Capital’s ambition to deliver billions of dollars per year to meet the needs of Australia’s ageing population.
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There is a significant shift in Australia’s demographics taking place. According to the sixth Intergenerational Report – a major report that projects the outlook of the economy and the Australian government’s budget to 2062–63 – Australians are not only expected to be live longer but will also be enjoying extended periods of good health in their later years.
While this seems like good news, a big question being asked is: how are we going to finance these longer lives?
According to the Intergenerational Report, over the last four decades (from 1982–83 to 2022–23), the median age in Australia rose by 8.3 years to 38.5 years. Furthermore, the country’s total fertility rate has been declining since the 1960s due to various societal, cultural, and economic factors.
This has led to a deceleration in Australia’s population growth, which is projected to average 1.1 per cent annually over the next four decades – a decrease from the 1.4 per cent annual growth observed in the preceding 40 years.
According to these projections, Australia’s population is expected to reach 40.5 million by 2062–63, with a threefold increase in individuals aged 85 and above.
An ageing population, with low fertility rates and longer life expectancy, presents long-term economic and fiscal challenges. There will be a diminished proportion of working-age individuals relative to the growing number of older citizens, placing a much higher financial burden on a smaller cohort of working people.
But one viable solution to financing a fulfilled life post-retirement is at hand: reverse mortgages.
Reverse mortgages empower individuals aged 60 and above to access their home equity without the immediate obligation to repay the lender. That’s because the repayment only becomes due when the property is vacated, sold, or the home owner passes away. This arrangement allows retirees to access funds as either a steady income stream or a lump sum based on their individual needs and circumstances.
Considering that over 80 per cent of senior Australians are home owners, the federal government has previously highlighted the merits of reverse mortgages as a viable solution to ensure a comfortable retirement for the ageing population.
The 2020 Treasury Retirement Income Review indicated only a minority of retirees utilised their home equity to bolster their retirement lifestyle, suggesting the need for increased awareness on how home equity release can have significant potential to help support retirement incomes.
According to the report, releasing home equity can boost retirement incomes with a modest impact on debt. Withdrawing $5,000 a year would mean that retirees still have about three-quarters of the value of their home at age 92 for a house worth $500,000 at retirement. Retirees with higher value homes would maintain even higher proportions of home equity while still benefiting from significant improvements in replacement rates.
Reverse mortgage surge
According to the chief distribution officer at reverse mortgage lender Household Capital, Paul Stratton, there has been a “huge” uptick in interest for reverse mortgages in recent years.
In particular, there has been heightened demand among retirees seeking to refinance existing home loans or make home improvements as well as support their children in property endeavours. Escalating housing and living costs, coupled with limited access to the age pension, have been the main drivers for many retirees exploring reverse mortgage options to alleviate financial strains.
“What we are seeing is that about 40 per cent of Household Capital customers still have a home loan in place,” he said.
“Most of these people have been unable to refinance when rates started to increase because they were no longer earning a regular income.”
Given the opportunity that exists, more brokers have been building in reverse mortgages into their offerings – particularly if they have clients aged 60 or older with relatively low loan-to-value (LVR) ratios.
Around 25 per cent of Household Capital’s new reverse mortgages stem from the broker channel, but a significant number of brokers remain unaware of these options.
According to Household Capital, reverse mortgages can be used in a variety of ways, adding: “Brokers are moving away from traditional uses of reverse mortgages, such as a ’line of credit’, instead using them as a solution for a range of purposes,” Mr Stratton said.
For example, more Australians are turning to reverse mortgages to refinance their home loan or undertake home renovations, as well as expedite financial bequests to their children and grandchildren. With life expectancy now surpassing 85 years, the children of many parents have already achieved home ownership by the time the parents pass, diminishing the urgency of inheritance.
Consumer protections
While there has been concern about reverse mortgage offerings in the past – largely focusing around the possibility of older borrowers not fully comprehending loan terms and potential implications for heirs or family members inheriting the property – by partnering with a specialist in reverse mortgages such as Household Capital, brokers can be assured their clients are well looked after.
Indeed, Mr Stratton flagged that the Consumer Credit Protection Act 2009 has been updated in the past 10 years to bolster consumer safeguards, resulting in a more stringent process for obtaining a reverse mortgage.
These enhanced customer protections should provide reassurance to both brokers and clients, he said.
“The amount available is modelled such that it’s unlikely the value of the loan capitalises to exceed the home value – these LVRs are prescribed by ASIC,” he said.
“However, should the unthinkable happen – maybe interest rates go sky-high, or property prices plummet – the product provides a ’no negative equity guarantee’, so the lender only has recourse to the value of the home.”
This means a borrower’s accumulated interest cannot exceed the value of the house and they can live in the property until they die or move out.
It’s also important to consider the impact of a relatively higher interest rate, Mr Stratton said.
“The trade-off of not having to make repayments is a higher interest rate is charged to finance these types of loans. However, when compared to other forms of credit (lines of credit, credit cards) the interest rate is more favourable.”
With Australia’s ageing population projected to reach 8 million by 2060, reverse mortgages “can provide a solution for practically any home owner over 60,” Mr Stratton concluded.
REVERSE MORTGAGE CASE STUDY
THE CLIENT:
Retired pensioner widow Julie, aged 71
THE FINANCIAL POSITION: Julie’s home was valued at $2.5 million and she had an existing mortgage of $232,000, with monthly repayments of $1,141.
REASON FOR BORROWING:
Having already consumed her superannuation and other savings, Julie was totally reliant on the age pension. As such, she struggled to meet her repayments. She and her broker had unsuccessfully tried to negotiate with her existing bank. They were likewise unable to refinance elsewhere.
THE SOLUTION:
Working with Household Capital, Julie’s broker was able to refinance her mortgage, take an additional sum of $20,000 to paint her home, and provide an income stream of $1,000 per month over the next five years. At an interest rate of 8.7 per cent, assuming no repayments are made and her home’s value grows at 3 per cent per annum, projections show Julie’s remaining equity at age 86 would be approximately 72 per cent. Julie intends to downsize and repay the loan before she turns 80.
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