In Retirement Income on Tuesday 13rd Jul, 2021

The modern reverse mortgage: You’re safer than ever!

Jul 13, 2021

Do you associate reverse mortgages and home equity release with thoughts of older Australians ending up with debts they can’t repay? Losing their home? Their families forced to sort out a legal mess after their death?

Reverse mortgages have been available in Australia since the early 1990s and, for a long time, they were poorly designed, and user outcomes were not prioritised. Offered by a handful of banks and other financial services companies, reverse mortgages of that era typically came with high interest rates and opaque fee structures. Consumers were hit with excessive break costs to exit the mortgage early. At that time, reverse mortgages were loosely governed by state-based regulations, which left consumers exposed to predatory sales practices and badly designed products.

However, things have fundamentally changed. Following the introduction of the national Consumer Credit Legislation Amendment (Enhancements) Act 2012, reverse mortgage lending is now regulated federally and is one of the the most strictly regulated credit products in Australia, with clear consumer protections that apply throughout the loan period.

Since these changes were introduced, most traditional reverse mortgage providers exited the market and paved the way for new providers, such as Household Capital. As well as not carrying the ‘baggage’ of a history of misaligned products being sold inappropriately, the newcomers abide by responsible lending requirements and actively work to improve retirement outcomes for their clients. Even the federal government has expanded its home equity offering by opening up Centrelink’s Pension Loans Scheme to all Australians of Age Pension eligibility age.

But…memories of the old reverse mortgage market have lingered, which means some older Australians are missing out on an opportunity to significantly improve their long-term retirement funding.

A reverse mortgage isn’t selling part of your home

Before we explain how reverse mortgages have changed for the better, we need to explain one vital distinction; a reverse mortgage is not the same as a home reversion scheme.

In simple terms, a home reversion scheme involves the purchase of a portion of your home at a discount to its current value. The upside is that you receive payment for the portion of the home you sell, gaining access to funds without having to sell and move out of your home. You don’t need to make repayments, because the company offering the home reversion scheme recoups its money when your home is eventually sold.

The downside is that the discount applied to the market value of your home can be as high 75 per cent or more, depending on your age and other factors.

For example, if your property is worth $500,000 in today’s market and you access 25 per cent of it using a home reversion scheme, that portion of your property is theoretically worth $125,000. But the company offering the scheme may offer you 25 per cent or less of that value in return for taking a 25 per cent stake…so as little as $31,250.

When it comes to selling your home, though, the company offering the scheme receives 100 per cent of the capital gain made on the portion of your property it purchased. So, if your home rises in value from $500,000 to $750,000, when it’s sold, that company receives 25 per cent of $750,000 – $175,500 – in return for its original payment to you of $31,250. That’s quite a profit!

Getting the story straight on reverse mortgages

A reverse mortgage is a loan secured on your home, just like a regular mortgage. The difference is that while a mortgage lender advances you a lump sum with which to purchase a property, a reverse mortgage provider turns some of the equity built up in your property into a lump sum, an income stream – or both.

A mortgage requires you to make capital repayments with interest so the lender can recoup the money it loaned you. A reverse mortgage doesn’t require capital repayments or interest payments because the lender knows its loan is already covered by the equity in your property. The property doesn’t have to continue to gain value for you to be able to pay off your loan.

Instead, the interest charges on your reverse mortgage compound, so the size of your loan grows over time (as typically does your home equity, in line with property prices), until your home is sold and your original loan, plus accrued interest, is repaid.

Making capital repayments and/or interest payments during the term of a reverse mortgage will slow the growth of the loan, which is why Household Capital allows borrowers using its Household Loan to choose to make repayments if they wish, or to pay off their loan in full at any time without penalty.

Why reverse mortgages are safer than ever

Not only does a reverse mortgage allow you to retain complete ownership of your home, but there are also other consumer safety nets built into the consumer credit legislation. These include guaranteed lifetime occupancy and a no- negative equity guarantee. So, how do these guarantees work?

Under the Act, the size of your total loan cannot grow larger than the value of your home. In other words, you – or your estate – will never be left with a debt after the sale of your home. This is the no-negative equity guarantee.

To ensure your loan can’t grow disproportionately large compared to the value of your property, the Australian Securities and Investments Commission (ASIC) puts strict caps on the proportion of equity you can access. This cap feeds into the loan to value ratio (or LVR), a calculation based on your age and the value of your property, to determine the dollar value of home equity you can access. The older you are, the greater the proportion of equity that’s accessible to you.

ASIC also requires reverse mortgage providers to assume a very modest rate of property price growth – 3 per cent on average per year – to ensure that homeowners don’t rely on rocketing property prices to cover an out-sized loan.

A reverse mortgage cannot cause you to ‘lose’ your home, or have it sold out from under you unless you breach the terms of your loan. This is the lifetime occupancy guarantee.

Loan terms may differ between lenders but usually require you to do what’s normal for a homeowner: live in your home (rather than moving out and putting it up for rent), make sure your council rates are paid, that your property is insured and maintained.  Wilful property damage or neglect are likely to breach the loan’s terms.

And because repayments aren’t required under the terms of a reverse mortgage, it’s impossible for you to be in default; this is the most common reason a regular mortgagor would be forcibly removed from their property by a lender.

The Household Capital difference

As well as operating with conservative LVRs, at 4.95% (comparison rate 4.98%[1])  Household Capital offers the lowest interest rate currently available in the commercial reverse mortgage market – only the rate on Centrelink’s Pension Loans Scheme is lower. A lower interest rate means your total loan grows more slowly, so you have less to repay (and more equity) when your home is sold.

Household Capital provides several free, online calculators to allow you to clearly see how much you could borrow and how much you are likely to eventually repay.

And while the legislation requires all reverse mortgage providers to ensure borrowers take independent legal advice before taking out a loan, if you want to use a Household Loan as a lump sum contribution to your super fund, Household Capital requires you to seek independent financial advice too.

Why does Household Capital go to these extra lengths? Because it’s managed and advised by Australians who are sincerely committed to helping older Australians Live Well At Home in retirement.

Household Capital’s founder and CEO Josh Funder was previously the co-founder and chairman of Per Capita, an Australian research foundation that undertook ground-breaking studies on longevity and positive ageing. Board member Nick Sherry was Australia’s federal minister for superannuation and has worked with the World Economic forum on devising ways to create better pension systems.

Members of Household Capital’s advisory board Peter Kell, Peter Harris and Garry Weaven have all devoted their careers to getting better consumer, financial, working and retirement outcomes for Aussies; Kell as the former CEO of Choice and deputy chair of both ASIC and the Australian Competition and Consumer Commission, Harris as the chairman of Australia’s Productivity Commission and Weaven as the architect of the industry super fund system. The chair of the advisory board, Professor Deborah Ralston, was a member of the independent committee that undertook the government’s Retirement Income Review in 2019 – 2020.

Since its launch in March 2019, Household Capital has received a lot of positive feedback from its clients. It has a 4.8-star rating on Trustpilot, the independent consumer review site, where customers have rated Household Capital as ‘excellent’ for the service offered by its specialist consultants.

“It fails me to adequately acknowledge with deep thanks the skills, character and outcomes provided by our Household Capital Consultant,” happy client Tim Cohen wrote. “She led us through the sometimes sensitive and complex application process to the exact outcome we wanted (and needed!). Our experience has caused us to become ‘rave customers’ of Household Capital as we face the remaining financial years to come with contented confidence.”

Yet, despite this, the reverse mortgage market remains misunderstood and distrusted by some, even though it was one of the few products not censured during the 2018 Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry. As a result, many retired Australians experience financial stress and don’t enjoy the retirement lifestyle they deserve.

“There’s nothing stopping Australians from responsibly and safely accessing their home equity as part of their own long term retirement funding plan,” says Household Capital CEO Josh Funder.

“Australia has the world’s best regulation and statutory protection for any form of home equity access, but Australians don’t yet think of their home as both the best place to live and the best way to help fund their retirement – that’s where doing a better job of explaining the benefits of using home equity can really drive a positive change.”

[1] The Comparison Rate is based on a loan of $150,000 for 25 years. WARNING: this comparison rate is true only for the example given and may not include all fees and charges. Different terms, fees or other loan amounts might result in a different comparison rate.

HOUSEHOLD CAPITAL INFO Important information. Applications for credit are subject to eligibility and lending criteria. Fees and charges are payable, and terms and conditions apply (available upon request). Household Capital Pty Limited is a credit representative (512757) of Mortgage Direct Pty Limited ACN 075 721 434, Australian Credit Licence 391876. HOUSEHOLD CAPITAL™, the Star Device and Household Capital and the Star Device are trademarks of Household Capital Pty Ltd.
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial or legal situation, objectives or needs. That means it’s not financial product or legal advice and shouldn’t be relied upon as if it is. Before making a financial or legal decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services or legal advice.

Like to do more with your retirement?

Your home equity could be the key that unlocks a world of opportunity in retirement. Whether you want more income or a lump sum to renovate your home or replace the car, you can try our home equity calculator to see how much better off you could be in retirement. You can even prequalify for a Household Loan.

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Have you got unanswered questions about reverse mortgages and equity release? What are they?

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