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Income boom for retirees who own property

Duncan Hughes   Reporter - AFR
January 8, 2020 2 MIN

Baby Boomer home owners in some of the nation’s plushest postcodes could release income from their properties equivalent to three to five times their existing superannuation, according to a new analysis.

Actuarial analysis of super savings and median property values in blue-chip suburbs reveals average Boomers aged over 60 are sitting on fortunes that could be used for their super income, or transferring wealth to children and grandchildren.

In Sydney’s exclusive harbourside Vaucluse the median property value is $4.7 million and average super balance of over 60s is about $200,000.

More than 25 per cent of retirees aged over 60 in the suburb could draw down about $1.4 million of the value in their house – in addition to their superannuation – through a reverse mortgage product. In Melbourne’s bayside Brighton, 12km south-east of the CBD, the median property is worth about $2.4 million.

The average superannuation balance of an over 60 is just over $282,000 but more than 25 per cent of property owners aged 60 could draw down $722,000 in addition to their superannuation.

Huge Unmet Need

The analysis was compiled by Household Capital, a specialist in providing long-term access to home equity, based an actuarial analysis of superannuation funds, CoreLogic property values and government data cross-referenced with data from the Association of Superannuation Funds, the nation’s peak super body.

“There is a huge unmet need for retirement funding,” said Josh Funder, Household Capital's chief executive and founder, Rhodes scholar, venture capitalist and former business consultant, including for Boston Consulting Group.

Mr Funder said the company is based on his work on longevity and ageing as the chairman of think tank Per Capita. “Most Australians can double their available funding at retirement through reverse mortgages.” He added the retirement saving estimates are conservative.

A reverse mortgage borrower can take funds from the equity in their home as a lump sum, regular income stream, cash reserve, or a combination of all three.

The mortgage, interest and fees do not need to be repaid until the property is sold.

Giant Next Eggs

Boomers in Melbourne and Sydney are potentially sitting on giant nest eggs because the homes they bought 40 years ago have compounded in value to be among the world's most expensive residential property.

But the super guarantee was not introduced until about half way through their working lives – and at a much lower rate – resulting in their savings being much less than younger generations.

An estimated 4.5 million retirees have equity in their homes that is on average about four to five times their super savings, which for male Baby Boomers is about $150,000 and for females about $80,000.

Avg home equity avail to people over 60

Nick Sherry, a former superannuation minister and chairman of Household Capital, said releasing home equity needs to be encouraged to top up modest retirement savings.

Rules for providing the products had been tightened by regulators to prevent problems, such as high fees, compounding debt and the effect on pension eligibility.

Mr Funder said: “It now has the strongest consumer protection of any financial product in Australia.” Westpac Group, Macquarie Bank and Commonwealth Bank of Australia are among major lenders that pulled out of reverse mortgages.

Mr Funder said banks were “not good” at providing reverse mortgages, which they sold as a product, rather than ensuring they met their customers' long-term retirement needs.

Reverse mortgages allow retirees to draw 15 per cent of household equity at 60 and increase withdrawals by 1 per cent a year for the next 20, or a cap of 35 per cent.

Original article on the AFR

Applications for credit are subject to eligibility and lending criteria. Fees and charges are payable and terms and conditions apply (available on request). Household Capital Pty Limited is a credit representative (512757) of Mortgage Direct Pty Limited ACN 075 721 434. Australian Credit Licence 391876.

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Reverse mortgages set to slip into top gear as Baby Boomers retire

Duncan Hughes   Reporter - AFR
November 13, 2019 2 MIN

Releasing home equity is an “important and growing element of post-retirement income planning” as home-owning Baby Boomers seek ways to top up modest savings, according to former superannuation minister and chairman of Household Capital Nick Sherry.

Retail and industry funds are increasing efforts to build retiree confidence in the sector which was hard hit by the loss of wholesale funding in the wake of the global financial crisis and some irresponsible lending that led to a regulatory shake-up.

Westpac Group, Macquarie Bank and Commonwealth Bank of Australia are among major lenders that pulled out.

An estimated 4.5 million retirees' equity in their homes is on average around four to five times their super savings, which for male Baby Boomers is about $150,000 and for females around $80,000, Mr Sherry said.

Existing retirees are estimated to have about $1 trillion in home equity.

“People still think reverse mortgages are still in the old wild west days, they do not know about the new regulatory framework. It is now the most regulated financial product,” said Mr Sherry, whose company is an independent retirement funding provider.

Demand for the products is expected to increase because, according to ASIC, eight in 10 ageing Baby Boomers strongly prefer to "age in place" – which means in their home – for as long as possible.

Paul Dwyer, director of Reverse Mortgage Finance Solution, said: “Demand is strong. What is holding back the industry is education and knowledge.”

Market researcher IBISWorld predicts annualised growth will be around 0.9 per cent over the next five years to about $266 million.

Mr Dwyer said some local lenders are expected to make a comeback with new products and some overseas lenders are considering launches.

He said reverse mortgages would be an ideal product for retail and industry funds to offer because they could provide an annuity-style flow of income to balance their equity and fixed income portfolios.

Garry Weaven, who is on the advisory board of Household Capital, said: “By 2030 our expected $6 trillion super pool will have well and truly outgrown the capacity of our local sharemarket. If we don’t want to export an increasing proportion of this capital, we need to develop new opportunities at home that offer attractive diversification and return characteristics.”

Mr Weaven said the excess capital “corresponds to where our national needs are greatest – infrastructure and housing.

“Infrastructure, however, faces obvious impediments – the various needs and timings of state and federal governments hardly makes for a reliable investment environment,” he said.

“Residential housing requirements, on the other hand, are more predictable, and their funding sources, obviously too few in number and too conservative to innovate.”

A reverse mortgage borrower can take the funds from the equity in their home as a lump sum, a regular income stream, cash reserve, or a combination of all three.

The mortgage, interest and all fees do not need to be repaid until the property is sold. Sometimes this can be from the estate of the last remaining borrower, or if the last remaining borrower leaves the property for more than 12 months.

Recent analysis by CBA, the nation's largest lender and a key reverse mortgage provider, predicts 20 per cent of Australians will be over 65 within 12 years. That's an increase of 3.6 million to 5.7 million in about 15 years.

Many older people are not able to borrow money through a conventional home loan because they do not have sufficient income to service the loan.

Reverse mortgage fees are on average about 2 per cent higher than standard loans and include higher establishment and service fees than regular loans, according to analysis by Canstar, which monitors rates and fees.

Original article on the AFR

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