Going forward in reverse

It may be a little inaccurate to say reverse mortgages are back given that they never completely went away. They gained significant momentum in the early 2000s, with more than 20 lenders offering the product at one stage. However, the market took a severe hit during the GFC as funding dried up and all but a handful of lenders walked away.

The situation has since improved, although reverse mortgages are still a niche product. The Commonwealth Bank is the only member of the big four that currently offers reverse mortgages, while Bank of Melbourne, BankSA, Bankwest, HomeStart Finance, Macquarie Bank and St George also offer reverse mortgages. P&N Bank is another lender that does reverse mortgages, although not through brokers. However, that number looks set to increase. One lender told The Adviser off the record that it plans to reintroduce the product.

More are set to follow, according to Paul Dwyer from reverse mortgage specialist Team Australia Mortgage Solutions. He predicts there will be more than 10 lenders offering reverse mortgages within the next 12 months.

What is a reverse mortgage?

A reverse mortgage is a loan reserved for older Australians that allows them to borrow money against the equity in their home. The money only has to be repaid when the property is sold, the customer leaves the home or the customer dies.
Borrowers can’t be forced to make repayments or surrender their home while they’re alive.

Lenders recoup the loan once the home is sold. They are liable for any shortfall if the loan turns out to be greater than the proceeds from the sale. That’s why lenders will only allow customers to borrow against less than half the value of their home.
The younger the client, the less they can borrow because they are likely to live for longer, which means there is more time for their loan to compound. The loans have to be signed off by an independent legal adviser, so no one can qualify unless they’re of sound mind.

The reverse mortgage market has its own governing body called the Senior Australians Equity Release Association, or SEQUAL. Brokers need SEQUAL accreditation before they can sell the product.

SEQUAL chairman John Thomas is an advocate of reverse mortgages because they allow older Australians to remain in their home for longer. He says the loans are generally used for repaying debt, taking care of large bills and modifying the house to make it senior friendly. Some borrowers use the money to pay for luxuries like holidays, but most spend it on essentials, he says.

“The only downside is that there is a requirement to maintain the house in reasonable condition, that they pay the rates and insurance on it, but beyond that I don’t think there’s any downside,” he says.

Mr Thomas is just one expert who believes the reverse mortgage market is set for a significant expansion. Indeed, SEQUAL’s research shows the market is already growing at about 10 per cent per year.

Back in 2004, when the association was launched, there was a “philosophical barrier” around reverse mortgages because most people believed that you worked all your life to pay off the mortgage and then passed on the family home to the next generation.

Today, older Australians are more open to the idea of drawing on their equity to improve their quality of life, and many of their children are also supportive of the idea, he says. Mr Thomas believes that as more borrowers enter the reverse mortgage market, more lenders and products will follow.

State of play

All of this suggests brokers should be paying more attention to reverse mortgages. However, a poll conducted by The Adviser in April found that most brokers don’t care about the product. According to the poll, only 35.4 per cent of respondents offer reverse mortgages – and anecdotal evidence suggests that figure is inflated, presumably because the poll was more enticing to brokers who already offered reverse mortgages.

The other numbers are even more interesting. The poll found that 11.4 per cent of respondents were thinking about offering reverse mortgages, but 24.1 per cent said their clients weren’t interested, and 29.1 per cent believed the product was wrong.

So a majority of brokers seem to have turned their back on reverse mortgages, while almost one third have a moral objection to them.

There is an impressively diverse range of voices willing to make the case for reverse mortgages. Macquarie Bank points out that all borrowers need to seek financial and legal advice before they can borrow against the equity in their home. Reverse Mortgage Finance Solutions director Peter Bolitho calls reverse mortgages “the most regulated of any credit product in Australia”.

The MFAA and FBAA say pensioners are entitled to a product that will help them exploit the equity in their home after decades of hard work.

It’s unsurprising that brokers and lenders who sell the product would insist that it is ethical. Cynics might also suggest that the two industry associations have to back their members for political reasons. However, reverse mortgages are also backed by seniors groups that exist to champion the interests of elderly Australians.

Ian Yates, chief executive of seniors association COTA, explains that reverse mortgages can help pensioners improve their quality of life by allowing them to modify their home or access superior aged care services. He adds that his association is more comfortable with reverse mortgages today than before the GFC because they are now far better regulated and borrowers can no longer have their houses sold out from beneath them.

View from the front lines

Sydney-based brokerage Senior First has offered reverse mortgages since being founded in 2006 – and managing director Darren Moffatt believes the market is the most promising he has seen it since the GFC.

“All the wind went out of the sails in 2008 and the investment capital is only just starting to return to the sector,” he says. “There is money coming back into it and the reason for it is there is a wave of people retiring with little to no super. There’s a huge need, there’s a huge funding gap, and the only feasible option is reverse mortgages.”

Mr Moffatt says writing reverse mortgages is very satisfying because you make a real difference to people’s lives. It can also be profitable if you are good at dealing with older people and prepared to take a long-term approach to growing your business, he adds. However, he recognises that many brokers don’t share his enthusiasm.

“They perceive it as low value and too much work. That can be the case sometimes, but increasingly I’m finding it’s less and less the case, because people are now more educated about these loans, so they understand how they work and they’re more aware of the pros and cons,” he says.

“For those who have an older client base, they should consider reverse mortgages, but otherwise no.”

Peter Allen, an eChoice broker based in the NSW coastal regional town of Nambucca Heads, is one of the few brokers for whom reverse mortgages make more sense than regular home loans.

“With over 60 per cent of my local market now aged over 65, no new homes being built so no first home buyers, high unemployment so few qualified borrowers, and two of my local postcodes delisted by LMI during the GFC and never reinstated – if I don’t do reverse mortgages, I don’t eat – simple really,” he says.

Victoria-based Homeloans broker Gerard Roffey had the opposite experience. He wrote reverse mortgages for four years but let his accreditation lapse because SEQUAL increased its accreditation fee and reverse mortgages weren’t generating enough income to justify paying it.

“The loans were generally well under $100,000 – generally $30,000 or $50,000 – so the commission you got on it was negligible,” he says. Another problem was that the average reverse mortgage demanded more of his time than the typical home loan, he says.

Judy West from Judy West Finance takes a nuanced approach to reverse mortgages. She likes writing them and enjoys helping her clients, but she doesn’t actively promote the product and she feels the market isn’t being properly serviced by the lenders.

“As a result of the GFC and the turmoil created, a number of lenders left this market. Those few remaining have a monopoly, which is never a good thing for borrowers. None at all offer a fixed-rate product – not one. Previously borrowers had three options with most lenders: variable rate; fixed rate for four years then variable; or fixed rate for the life of the loan,” she says.

Ms West also believes rates are too expensive and the product is unnecessarily complicated.

Predicting the future

Younger Australians are having fewer children and older Australians are living for longer, which means there are now relatively fewer taxpayers to support more pensioners. That’s why Kevin Rudd increased the pension age from 65 to 67 in 2009 and why Tony Abbott has further increased it to 70. It’s likely future governments will push the eligibility age even higher and maybe reduce the pension.
That in turn could force more people to consider applying for a reverse mortgage.

Smart businesspeople follow the money. A growing reverse mortgage market will inevitably attract more suppliers, be they lenders or brokers.

The industry has been talking for years about the value of diversification; write a home loan for a client when they’re young and try to sell them other products as well so the client becomes stickier and keeps returning throughout their lives. Reverse mortgages could be part of that cycle.

A brokerage could conceivably sell residential finance to a client when they’re 30; write them several investment loans in the decades that follow; and then help them secure a reverse mortgage later in life.

That could bring the brokerage into contact with their children, who could then also be turned into clients so that the whole cycle begins anew.

Who knows? Maybe reverse mortgages will become the ultimate ‘sticky’ product?