Many older Aussies struggle to maintain their standard of living once the regular pay cheques from a job stop coming in, which makes reverse mortgages – a financial product that allows people to draw on the value of their family home to cover immediate expenses – an attractive option for some retirees.
After all, seven out of 10 Aussies aged 55 to 85 own their own homes, with an average value of $632,598, making it quite a substantial pile of wealth from which to draw. And the Age Pension alone, at a maximum of $907 per fortnight or $1,368 for a couple, is felt by many to be insufficient given the rising cost of living.
But a new review of the reverse mortgage sector by the Australian Securities & Investments Commission (ASIC) has revealed that borrowers are largely unaware of the risks and potential future costs associated with this particular type of loan.
The ASIC researchers looked at 17,000 reverse mortgages, 111 consumer loan files, lender policies, procedures and complaints, as well as interviewing 30 borrowers and more than 30 industry stakeholders. Its report found that reverse mortgage loans were most commonly taken out to cover short-term costs such as bills and debts, decorating, renovation and car expenses. The average sum taken out was $118,627, mainly by cash-poor borrowers who owned their own home but had very few other assets to their name.
“Reverse mortgage products can help many Australians achieve a better quality of life in retirement,” ASIC Deputy Chair Peter Kell said. “But our review shows that lenders and brokers need to make inquiries that would lead to a genuine conversation with customers about their possible future needs, not just a set of tick boxes on a form.”
Worryingly, the review revealed that borrowers generally failed to consider the impact the loan may have on their ability to cover future costs such as aged care, and that lenders were not accurately documenting the borrower’s long-term financial needs or objectives.
Under laws imposed in 2012, borrowers can never owe the bank more than their home is worth and are permitted to remain in their home until they die or opt to move out. However, depending when the loan was taken out and how much was borrowed, some borrowers may not be left with enough equity for any longer-term needs.
The results of the review showed that if property prices were to remain stagnant, a whopping 26 per cent of borrowers would be left with less than $200,000 in equity by the time they reach the age of 84.
ASIC also said that lenders needed to do more to to ensure that borrowers were not as risk of elder abuse, noting that under the new code of practice just approved by Australia’s banks, the banks will be required to take extra care in their dealings with customers who may be vulnerable to such abuse.
ASIC’s report also found that there are limited choices for consumers looking to take out a reverse mortgage, as several providers actually withdrew from the market after the global financial crisis.
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