Meet the challenge of funding an ageing population

The Morrison government recently announced that the Centrelink Pension Loans Scheme reverse mortgage will be relaunched in 2022 as the Centrelink Home Equity Access Scheme – a welcome move in meeting the challenge of funding an ageing population.

At the same time, one of the world’s biggest banks, Citi, and a superannuation investment giant, IFM Investors, bankrolled a $300m funding package for independent specialist retirement funding provider Household Capital, supercharging its strategy to allow retirees to use equity in the family home to fund their retirement expenses.

It’s important that all providers working to improve funding for an ageing population deliver a clear customer understanding of their complete financial situation and provide responsible, long-term access to their funds to give confidence in retirement funding.

Since 2016, Household Capital has focused on delivering the three pillars of wealth to Australian retirees: that means access to the pension, superannuation, and home equity. The Retirement Income Review in 2020 and now the expanded Centrelink Home Equity Access Scheme reverse mortgage improve the breadth of options available to Australian retirees to fund their future.

Working together, public, and private providers alike, need to build a growing and vibrant market that can provide a range of options for retirees to use their home equity to fund their retirement. All told, there is more than $1 trillion of home equity already saved by Australian retirees, who are the wealthiest in the world.

The challenge facing Australian Baby Boomers is that most of their wealth is tied up in the home, not superannuation. Based on taxation and census data, the median household in Australia, at retirement, has less than $200,000 in superannuation and more than $750,000 in home equity.

Still, we now have much better ways to deliver retirees’ wealth back to them and restore confidence in their future. Consumer awareness that retirees can now access their own wealth through home equity to fund their own retirement is critical in meeting the challenges of an ageing population.

The government alone cannot meet the challenge of housing and funding an ageing population – just read the aged care royal commission or Intergenerational Reports.

The federal government has repeatedly stressed that the Centrelink Home Equity Access Scheme is voluntary for retirees who need more funding than the pension provides, but there is no indication that the government will increase the rate of the Age Pension or maintain other entitlements to meet the funding shortfall of an ageing population.

While both Centrelink and commercial solutions allow retirees to access home equity, they are significantly different products and provide different solutions for retirees. The Centrelink Home Equity Access Scheme is where the government puts a form of reverse mortgage on your home – it meets the needs of customers who require a modest top up above the level of the Age Pension.

Many other retirees want flexible access to income and capital, now and in the future, expect the funds to be in their account within days and demand personalised service. This could be a lump sum, a monthly, quarterly or annual income stream, a cash reserve or a combination of all three.

Commercial loan amounts range from $50,000 to over $1m, whereas the Centrelink Home Equity Access Scheme payments are capped at 150 per cent of the Age Pension. Calculated against a full pension, this means a limit of approximately $18,000 per year and allows payments either in two lump sums or in regular limited (fortnightly) payments.

Already Australian retirees enjoy some of the lowest home equity interest rates in the world and benefit from the world’s best practice regulatory protections. However, the Centrelink reverse mortgage is excluded from responsible lending and the consumer confidence that comes with it.

Looking to the international markets, the United Kingdom, Canadian and Australian private markets have all innovated to provide improved access to home equity and deliver significant new sources of retirement funding.

In the UK there are more than 200 home equity products available to retirees delivering over £4bn ($7.4bn) per annum of home equity to improve retirement funding. In Canada, Home Equity Bank, the leading provider originating around $C1bn ($1.1bn) per annum, was recently acquired by the Ontario Teachers’ Pension Plan.

In the US, the federal Home Equity Conversion Mortgage has failed the needs of many retirees with default rates consistently over 10 per cent per annum.

It’s important that the private sector work with the Australian government to make sure the Centrelink Home Equity Access Scheme learns the lessons from other markets to deliver for the needs of Australian retirees.

Australian retirees are the wealthiest in the world – working together we can deliver that wealth back to our seniors, make retirement a fantastic phase of life, and lead the world in meeting the challenges of an ageing population.

Joshua Funder is the CEO and managing director of Household Capital.

Original article in The Australian Business Review