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How global blue chips could help retiree income

Duncan Hughes   Reporter - The Australian
June 17, 2020 4 MIN

Income-starved investors could look overseas to boost dividend income with global stalwarts that can afford to keep paying out, according to a leading UK fund manager. Scores of Australian companies – like many overseas – are suspending or cutting shareholder distributions.

Returns from leading Australian income funds have fallen into negative territory over the last 12 months, major banks continue to slash derisory savings rates and there is a deteriorating outlook for fixed income funds investing in corporate and government debt.

London-based Ian Mortimer, portfolio manager of Guinness Global Equity Income Fund, which has about $1.8 billion under management, says a longer-term strategy might be to focus on global sources of dividend income.

“Why limit yourself to local market dividends?” asks Mortimer. “The COVID-19 crisis has shown in sharp relief the weakness in focusing on dominant local banking and commodity stocks. Why exclude companies like Microsoft and Nestle from your dividend opportunity set?”

The fund is run by Guinness Asset Management Global, established in 2003 by Tim Guinness, a member of the eponymous centuries-old brewing and investing family that continues to be among the richest in the world.

Mortimer is a founding manager of the multi-award-winning 10-year old fund, which is seeking to expand its presence in Australia’s $2.7 trillion superannuation sector.

The global fund, which selects its 35 stocks without the influence of index weightings from around 500 candidates, is designed to provide dividend income at all times by investing in companies that can maintain payments.

"You are far better off in a growth company paying out lower dividends than investing in a company with low growth paying high dividends."
Ian Mortimer, portfolio manager

It has avoided the worst of the cuts so far and is down about 3.7 per cent since January compared to peers down 11 per cent. None of the holdings in the portfolio have cut or stopped paying dividends. Mortimer expects to keep paying a 3 per cent yield.

“Our portfolio targets companies with enough cash to be in the best position to pay,” says Mortimer.

Australian investors need to remember, says investment strategist Giselle Roux, that global dividend yield is significantly lower than in Australia, nor are there franking credits. She is a strong advocate of retirees seeking income not only from dividends but capital gains. "You are far better off in a growth company paying out lower dividends than investing in a company with low growth paying high dividends," she adds.

"Investors need to understand there is a balance and both are right: you can have local shares and franking credits and you can balance that with global stocks, dividends or growth."

Shortage of cash

Companies are cutting or cancelling dividends either because of a shortage of cash thanks to the slowdown or they're reluctant to make payouts due to economic uncertainty or regulatory pressure.

NAB and ANZ cut or suspended dividends for 2020 after a request from the regulator. CBA shareholders will have to wait until August when the bank is due to report. Sectors caught in dividend cuts include airlines, travel, construction, retail and energy.

Mortimer says 50 per cent of the Guinness portfolio is in consumer staples and health care companies. By contrast, this sector makes up about 20 per cent of the MSCI Index.

Key companies include tech giant Microsoft, consumer goods group Procter & Gamble, fund manager BlackRock and food and drink conglomerate Nestle.

There’s renewed focus on income-generating assets because retirees say the COVID-19 crisis has slashed their income and they are calling on the federal government to consider changes in the age pension, deeming rates and the Commonwealth Seniors Health Card.

The Reserve Bank of Australia cash rate has fallen to 0.25 per cent and the 10-year government bond yield is 0.87 per cent.

The top rate for a $100,000 12-month term deposit is 1.65 per cent from Judo Bank, ME and Qudos Bank.

Major banks such as ANZ, NAB and Westpac continue to slice savings rates. ANZ recently cut its rates for Online Saver and Progress Saver by about 15 basis points following earlier cuts in March and April.

On Monday, CBA cut between 0.05 per cent or 0.10 per cent from all its term deposits.

No Surprises

“There can hardly be a surprise that savers and retirees are looking for stronger returns in different asset classes and, in so doing, are confronting their risk appetite,” says Steve Mickenbecker, group executive for Canstar, which monitors fees and rates.

Of the income funds invested in Australian shares covered by fund monitor Morningstar, the top performer over 12 months to the end of May is Colonial First State’s Wholesale Imputation fund, which lost 2.62 per cent. Over three years the fund – which seeks income from dividends, franking credits and capital returns from Australian shares – returned 7.7 per cent, according to Morningstar.

The worst performer in the income funds monitored by Morningstar was Russell Investments High Dividend Australian Shares ETF which lost nearly 18 per cent. Over three years it was down just over 2 per cent.

Alternatively, fixed interest managed funds offer investors a regular income for a specified term with the expectation that the principal will be repaid at the end of the term, or maturity date.

They invest in a wide range of instruments, including corporate bonds, government and semi-government bonds and short-term unsecured debt.

Colonial First State's Firstchoice Australian Bond Fund has a 12-month return of about 6.58 per cent to the end of April. It charges 0.47 per cent annual fees, or $470 on a $100,000 investment.

Australian Ethical Investments's Ethical Fixed Interest Fund posted a return of 5.49 per cent over the same period. It charges 0.10 per cent annual fees, or $1000 on a $100,000 investment.

Difficult to replicate

But these returns are likely to be difficult to replicate from the current low point in the interest rate cycle, says Mickenbecker.

“The risk profile is higher with corporate bonds and other asset-backed securities in fixed interest fund portfolios. Four per cent-plus returns are going to be very hard to replicate,” he adds.

Another option for retirees facing financial shortfalls is to apply for “accelerated access” to capital in their home.

Household Capital is offering a $20,000 drawdown on home equity. “We know retirees are doing it tough and facing reduced incomes due to shrinking super balances and investments,” says chief executive Joshua Funder.

Applications for the $20,000 finance package will be fast-tracked, with the funds typically available within two weeks, he says. Regular interest repayments are not required, and applicants can pay back the money at any time without financial penalty. The cost is 1.5 per cent of funds drawn.

By contrast, applications for the federal government’s Pension Loans Scheme must be made through Centrelink, with estimated wait times of up to nine months, and payments only available in twice-monthly instalments.

Original article on The Australian

Home equity product’s fast cash

Damon Kitney   Victorian Business Editor - The Australian
June 16, 2020 1 MIN

Retirees facing financial pressures flowing from the COVID-19 pandemic will be able to apply to draw $20,000 on their home equity using a product being launched on Wednesday by independent specialist retirement funding provider Household Capital.

The firm, backed by British insurer Legal & General, industry super funds-backed ME Bank, rich-lister barrister Allan Myers, former Macquarie Group executive Jim Miller and former federal super minister Nick Sherry, allows retirees to use equity in the family home to fund their retirement expenses.

Its “rapid access contingency” $20,000 home equity offer fast-tracks applications to make the funds available within two weeks.

Household Capital chief executive Josh Funder said regular interest repayments were not required and applicants could repay at any time without penalty.

The funding would be a boost for retirees facing income loss due to falling dividends, term deposit rates and rental income, he said.

“We all know retirees are doing it tough and facing reduced incomes due to shrinking super balances and investments,’’ Mr Funder said.

“The government stimulus package focused on working Australians and while the banks have provided interest repayment holidays, none of that has helped retired Australians get through the crisis.”

Applications for the federal government’s Pension Loans Scheme must go through Centrelink, with estimated wait times of up to nine months and payments in twice-monthly instalments.

Household Capital will also launch on Wednesday what it calls the “Home Income” offer, a regular drawdown on home equity to allow retirees to maintain their retirement lifestyles.

Garry Weaven, the former chairman and founder of IFM Investors and former chairman of Industry Super, is chairman of the advisory board of Household Capital, which has established a $100m wholesale debt facility to provide funding for home equity.

Reverse mortgages, where homeowners borrow against equity in their property, typically for short-term reasons, have been heavily scrutinised by regulators.

But Household Capital claims to use sophisticated algorithms to combine a retiree’s home equity, superannuation and age pension to provide a full, long-term picture of a borrower’s financial profile.

L&G’s this year bought a 20 per cent stake in Household Capital by anchoring an $18m Series B financing for the Australian firm, which also introduced Computer Power Group founder Roger Allen as an investor.

Mr Allen built Computer Power, which counted Rupert Murdoch as its largest investor, into one of Australia’s first global IT computer businesses.

L&G’s move increased to $25m the equity capital raised by Household Capital since 2017.

Original article on The Australian

COVID-19 puts squeeze on older Australians' finances

Bina Brown   Contributer - The Australian
April 8, 2020 5 MIN

Cash-strapped retirees facing caveats on their homes may be better off with a reverse mortgage.

Older Australians are certainly feeling the impact of COVID-19, whether they're considering aged care or still able to live independently.

Many entering residential aged care face the dilemma of whether to sell assets in a sliding market to pay the refundable accommodation deposit, or go into debt.

Those able to stay at home with increased support are expected to revisit the various home equity release options – including reverse mortgages and the pension loan scheme – to cover any increased costs.

There are more than 1 million Australians receiving some form of government-subsidised home help. But those people and many others have also relied on family, friends and neighbours to help them in ways that they may now have to pay for, including home-delivered shopping and meals.

With property and sharemarket valuations taking a massive hit, now would not be the most rational time to liquidate assets to pay for extra help.

Where it is too hard and too isolating to cope more or less on their own, many older Australians are moving into residential aged care, either from their home or from hospital, in an unbelievably challenging time.

For her own personal protection and the protection of others, Margaret Jones* was last week fitted with a mask and gloves before she was escorted to her new unseen room in a Canberra aged care facility.

"In a scenario playing out in aged care across the country, family or friends have been banned from visiting until further notice."

Her clothing and furniture were delivered the day before and whisked away in similar fashion. Fingers were crossed that they went to the right room and they would fit. With two weeks' isolation ahead of her because of COVID-19 protections, Margaret will have plenty of time to unpack and sort things as she likes. Her meals will be delivered and staff will check in on her, but for the most part she will be on her own.

In a scenario playing out in aged care across the country, family or friends have been banned from visiting until further notice.

Margaret could have lived alone under similar conditions in her home of 40 years, without the help and with visitor restrictions. But with underlying health issues and early dementia, she saw the move to aged care as a positive for the longer term.

She had planned to sell her house to pay for the $550,000 quoted for her aged care accommodation. But restrictions on open homes and on-site auctions make it a less than ideal time to be putting a house on the market.

The accommodation component of aged care is quoted in the form of a refundable accommodation payment (RAD) that can be paid in full or as a daily accommodation payment (DAP) charged at the rate of 4.89 per cent, or a combination of both. A fourth option is to pay a portion of the RAD and use it to pay any remaining DAP. This reduces the RAD over time, meaning less is refunded at the end.

With the sale of her house now on hold and no other assets of note, Margaret has little choice but to pay the DAP, adding a further $31,000 a year to the care component of her aged care bill of $39,000 a year.

That’s a lot more than the $54,000 she gets in pension incomes, forcing her to eat into the cash savings she has until the property market rebounds.

Where it makes sense to sell a property to raise the necessary funds for the RAD, many care homes have in the past been prepared to accrue the DAP until the house is sold, knowing they would probably get their money within six months.

With property markets running hot in recent years it hasn’t been much of an issue.

But caution in the present circumstances has seen some facilities – including Margaret's – allow for the DAP to accrue, provided the facility operator can put a caveat on her home.

A caveat acts as a warning or formal notice to tell the public that there is an interest on the land or property for a particular reason.

While the caveat doesn’t prevent the property from being sold, the sale can’t be settled until the caveat is lifted.

The view of one real estate agent is that provided the caveat is removed at settlement, it shouldn’t be a problem.

But reverse mortgage specialist Paul Dwyer, director at Team Australia Mortgage Solutions, says the caveat could preclude the property owner from accessing an aged care loan to pay the DAP – which may be an alternative in the present environment if you don’t want to sell your house at a discount.

If you think the value of your property has dropped by $80,000 as a result of COVID-19, then paying $2000 interest to borrow $30,000 for the DAP for a year might be an option.

Dwyer believes credit options are often overlooked in aged care. Financial advisers operating in the aged care space will have an Australian financial services licence to discuss various payment options, but not the necessary Australian credit licence needed to talk about many of the lending options available.

Falling property prices along with a slump in share prices and cuts to income could be a significant driver behind a lift in aged care loans and reverse mortgages to pay for aged care, says Dwyer.

Borrowing money and paying about 6 per cent interest to pay the $74 a day daily accommodation payment relevant to a $550,000 RAD will look like a small amount a year if house prices drop substantially and it takes a year to even look like coming back to a level you’d want to sell at, he says.

Dwyer adds that even before the COVID-19 crisis, DAPs were more prevalent than RADs as a way of paying for aged care.

Big banks withdrew from the equity release space a few years ago, leaving specialist non-bank lender LaTrobe Financial, Heartland Seniors Finance, Household Capital and IMB to offer various aged care finance solutions. The government has also broadened its presence with its expanded pension loan scheme that allows eligible retirees access to the equity in their home.

While the pension loan scheme is an option, the maximum a single person can access is $472 a fortnight – hardly enough to pay $1036 a fortnight for a $550,000 room price.

Dwyer notes that higher upfront costs from two of these lenders means a lower interest rate from them loses its advantage, especially as aged care loans do not last as long as standard reverse mortgages.

Deloitte financial services partner James Hickey is a strong believer that reverse mortgages and the pension loan scheme are a good solution for the right customer in the right circumstances.

Only recently, the interest for reverse mortgages came from active retirees in their 60s and early 70s. Many were looking to travel and renovate their homes, as well as settle their debts and enjoy their new-found freedom without having to significantly tap into their superannuation or downsize their homes.

In today’s unprecedented times of social isolation, restricted travel and a need for extra help or care, interest may come from those wishing to avoid the risk of liquidating super and other savings not just to supplement a certain lifestyle, but to hang on to life itself.

*Not her real name.

Original article on The Australian

'Abandoned' SMSFs call on government for help

Duncan Hughes   Reporter - The Australian
April 7, 2020 2 MIN

Incomes of self-funded retirees are being clipped – or even lost – as the economic fallout of COVID-19 results in lower dividend payments and investment property tenants who can no longer pay rent.

Many self-funded retirees, who are not reliant on the age pension, are being forced to dip into their cash savings or crystallise investments that have lost value in falling stock markets.

John McCallum, National Seniors chief executive, said: “Retirees are very anxious that there are not going to be self-funded retirees for much longer.”

One of these retirees, a 74-year old man who did not wish to be named, said income from his two shops, which he purchased 20 years ago to fund his retirement, had stopped.

The former self-employed father of four said the hairdresser and cafe lessees both told him they could no longer afford to pay rent and closed their shops.

“A lot of my retired friends also rely on rental income and find themselves in the same position. I have gone from financial security to insecurity in 10 days,” he said.

It would be hard to sell the properties or find replacement tenants because of weak property demand, a ban on evicting tenants and struggling retail markets, according to property specialists.

Natalie McGreevey has written to Federal Treasurer Josh Frydenberg on behalf of her father and his friends highlighting their plight and asking for some temporary assistance for the duration of the pandemic.

“They are falling through the cracks,” Ms McGreevey said. “Their income has gone overnight.”

She said the retirees are too old for employment benefits but their property ownership disqualifies them from the age pension.

There are more than 1.5 million households with at least one investment property, according to Australian Taxation Office analysis.

Professor McCallum said the problem increases the longer the pandemic runs and that many self-funded retirees are complaining that they feel “abandoned” by the government.

“There is a concern that their struggle to make ends meet is not being recognised,” he said.

According to recent research, more than half of 66-year-olds were not accessing the age pension in December 2018 because their assets and income were too high, while 20 per cent were on a part pension. Only 25 per cent were drawing a full age pension.

National Seniors and retirement income specialists, such as Challenger, are researching what changes have happened since the onset of the virus and collapse of many traditional retirement income sources.

Josh Funder, chief executive and founder of Household Capital, which offers reverse mortgages, said there has been a 50 per cent increase in calls from self-funded retirees since the pandemic outbreak.

Mr Funder said the retirees understand investment returns are down and want to use their home equity, which ranges from $800,000 to $7 million, to help get them through the crisis.

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 Australian

Avoid doing serious damage to your super in falling markets

Duncan Hughes   Reporter - The Australian
March 25, 2020 4 MIN

Retirees who sell off their stocks quickly erode savings and make it more difficult when markets eventually recover.

Retirees are warned to avoid withdrawing big chunks of savings from their super accounts because of the risk of locking in losses in falling markets. Those saving for their retirement are also being urged to avoid big switches between asset classes, such as selling shares for lower-risk fixed income, that could crystallise sharemarket losses.
This particularly applies to younger savers whose funds have decades to recover, say financial advisers and other super specialists.

Paul Moran, principal of Moran Partners Financial Planning, says retirees and those coming up to retirement should avoid making big withdrawals from their equity funds as markets continue to fall.

Retirees who sell off their stocks quickly erode savings and make it more difficult to rebuild fund values when markets eventually start to recover, Moran warns.

“Don’t become a forced seller at lower prices,” Moran says. “It means more shares have to be sold at discounted prices to make up the amount being taken out, which results in fewer shares owned." Many may be tempted to sell shares to meet immediate cash requirements.

Ian Silk, chief executive of AustralianSuper, which has about $180 billion under management, urges those coming up to retirement to put the losses "into some context".

Silk says during the past decade balanced funds have produced "extraordinary" double-digit returns during seven of the past 10 years, with single-digit returns during the remainder.

"It is a stockmarket correction," he says. Silk urges younger investors, many of whom will be investing for the next 60 years, "not to act precipitatedly, unless there are particular reasons".

Some retail pension funds allow asset segregation, which means splitting a fund into two or more pools, such as blue chips, fixed income or cash.

A scheme member who draws down, say, $30,000 in cash is not forfeiting sharemarket gains or selling at a possible loss.

Trickle of losses become an avalanche

Super savers are estimated to have lost about $290 billion as the financial impact of COVID-19 hits the nation’s $2.8 trillion pool of retirement funds.

Since the beginning of the financial year, most balanced funds have fallen between six and nine per cent.

Losses have increased since late last month when the virus began to spread globally and sharemarkets plunged.

"History shows that investors who pull money out and put it into cash at times of crisis do not get back into the market."
Alex Dunnin, director of research at Rainmaker

For example, UniSuper's balanced fund has slipped by about 10 per cent while AustralianSuper's equivalent is down by about 13 per cent, compared to a fall of more than 30 per cent for the S&P/ASX200, says Rainmaker, which monitors super performance.

That has wiped out the past three years of growth from most default funds, says Alex Dunnin, director of research at Rainmaker.

“But those losses contrast with the much larger ASX downturn and go to show that spreading risk through diversification does work," says Dunnin.

Many super savers, particularly those coming up to retirement, are fearful about what to do as COVID-19 continues to spread, infecting countries and their economies and causing sharemarkets to plunge.

“The stockmarket has been very brutal,” says Dunnin about volatile markets. “But it has an uncanny knack of surprising on the upside.”

For example, since the global financial crisis major global indices have piled on gains of about 130 per cent, with the average balanced fund posting about 15 per cent last year, according to Rainmaker.

“History shows that investors who pull money out and put it into cash at times of crisis do not get back into the market,” Dunnin adds.

Wisdom in doing nothing

Graham Cooke, a manager at Finder, which monitors, rates, fees and performance, says: “It may sound counterintuitive, but the best thing for younger people to do right now is nothing. Those who react drastically to market volatility by switching to cash or defensive options can end up losing out. We saw this after the 2008 global financial crisis.”

Those closer to retirement should consider diversifying if they are too concentrated in a single asset class, such as property, Cooke says.

The accompanying table compiled by Morningstar, which monitors markets and managed funds, shows the sharp increase in losses during the past three weeks as investor concern grew about the potential impact on Australian companies.

total returns across different portfolios

Benchmarks for funds with allocations ranging from conservative through to aggressive have slipped from between six and more than 24 per cent, says Morningstar.

Josh Funder, chief executive and managing director of Household Capital, a home equity reverse mortgage specialist, warns the more assets sold to fund retirement, the less available to fund future income.

“Making withdrawals in a negative market crystallises losses,” Funder says. “It also limits the ability to recover losses when markets rebound by reducing the exposure to positive returns.”

According to actuarial calculations by Household Capital, a loss of 10 per cent requires an 11 per cent gain to recoup that loss, 30 per cent requires a gain of 43 per cent and 40 per cent a return of 67 per cent to get back to the original position.

Financial advisers are recommending that retirees use any spare cash before dipping into superannuation, if possible.

Greg Newbegin, a 56-year-old manager with a communications group, believes falling prices of top blue chip stocks are creating buying opportunities for those with extra cash.

Newbegin says: “There is no point in getting out of equities. I plan to buy up blue chips – but I don’t think it has yet reached the bottom.”

He also understands about $130 billion of mandated Australian super contributions are going into equity and fixed income assets each year, creating demand for quality assets.

But for others, the government is allowing the withdrawal of $20,000 from super funds – in two annual $10,000 tranches – as a last resort for individuals in financial stress.

The "safe" withdrawal rate for retirement income – with the amount set at the start of the drawdown period and remaining constant – is about 4 per cent of assets a year over 20 years, according to US research.

Original article on The Australian

Household Capital gains L&G, super funds support

Damon Kitney   Victorian Business Editor - The Australian
March 12, 2020 1 MIN
Household Capital chief executive Josh Funder says the specialist local retirement funding provider’s partnerships with local super funds and Britain’s Legal & General will supercharge its plans to deliver $1 trillion of funding into the Australian retirement funding system.

At a recent round table forum convened by Household Capital, executives of industry super giants AustralianSuper, HESTA and Cbus all agreed that the family home should become a significant part of Australia’s retirement funding solution.

The superannuation industry is focusing much more closely on the pension phase of retirement, rather than simply the accumulation phase.

The federal government has included home equity in the terms of reference for its current inquiry, chaired by former Treasury ­bureaucrat Mike Callaghan, into the retirement savings system.

Household Capital is chaired by Garry Weaven, the former chairman and founder of IFM Investors and former chairman of Industry Super.

L&G’s Retail Retirement division has purchased a 20 per cent stake in Household Capital by anchoring an $18m Series B financing for the Australian firm, which also introduced venture capitalist and Computer Power Group founder Roger Allen as an investor. Mr Allen built Computer Power, which counted media mogul Robert Murdoch as its largest investor, into one of Australia’s first global IT computer businesses.

The strategic investment is L&G’s first in Australia for 32 years following the $892m sale of its local business to Colonial Mutual in 1998. “L&G have led the explosion in the UK in delivering billions of dollars of home equity. We expect very much to learn from their experience in transforming the availability of retirement funding,’’ Mr Funder said.

“We think we can deliver $1 trillion of home equity into the Australian retirement funding system and L&G have recognised that.”

Following the deal, L&G’s Natasha Mora will join the Household Capital board of directors.

L&G’s move brings to $25m the total amount of equity capital raised by Household Capital since launching in 2017.

Its other backers include ME Bank, barrister Allan Myers, former federal super minister Nick Sherry, former Macquarie Group executive Jim Miller, former Skilled Group CEO Greg Hargrave and other private investors.

The firm has previously established a $100m wholesale debt ­facility with ME Bank to provide funding for home equity.

Mr Funder said the funds raised from the company’s Series B raising round would be used to grow staff numbers, increase marketing and expand its offering of hi-tech home equity retirement funding.

Original article on The Australian

UK giant takes stake in local home equity group

Duncan Hughes   Reporter - The Australian
March 11, 2020 2 MIN

Legal & General, the UK financial services giant with more than $2.2 trillion under management, has taken a 20 per cent stake in Household Capital.

It's the first strategic investment by Britain’s largest reverse mortgage provider in 22 years, following the $892 million sale of its local business to Colonial Mutual in 1998.

Household Capital has also announced a Series B financing, which takes the total amount of capital raised by the group which specialises reverse mortgage retirement funding to $25 million since launching in 2017.

Legal & General chief executive Chris Knight said: “The Australian equity release market is extremely promising, with Household Capital at the forefront of developing innovative funding options for retirees.”

Josh Funder, chief executive of Household Capital, added: “This strategic investment shows when it comes to tackling the challenge of our burgeoning retirement-age population, global investors see Australia as a significant market opportunity.”

A reverse mortgage allows borrowers from the age of 60 to convert the equity in their homes into cash. Equity is the value of the property, minus any mortgage debt.

The amount of equity that can be released is determined by age and property value.

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 35.5 per cent.

Interest rates vary from Household Capital’s 5.15 per cent to Heartland Seniors Finance's 6.2 per cent. Household Capital has an application fee of 1.5 per cent on drawn capital with no ongoing fees while P&N Bank charges $395 and an ongoing annual fee of $80.

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

Existing retirees are estimated to have about $1 trillion in home equity. Reverse mortgage providers claim interest in the products have increased by about 20 per cent in the past 12 months. This demand is expected to continue rising as retirees seek alternative sources of income to equity and fixed income, which are being smashed by tumbling markets and falling cash rates.

Retail and industry funds are attempting to repair retiree confidence in the sector that was damaged by the loss of wholesale funding in the wake of the global financial crisis and irresponsible lending that led to a regulatory shake-up.

Nick Sherry, former federal super minister and chairman of Household Capital, said regulation of the products has been over-hauled to protect consumers and achieve the government’s aim of making home equity the “third pillar” of retirement funding.

In the UK, Legal & General annually issues close to $2 billion worth of reverse mortgages.

The company’s local commercial director, Natasha Mora, will join the Household Capital board of directors.

The Series B funding will be used to increase Household Capital to expand its staff, boost marketing and product range.

Mr Sherry said: “It is a myth that Australian’s downsize. They want to continue to live in their homes and in their community. Growth in home equity retirement funding is not only necessary, it is inevitable.”

Original article on The Australian

Market mayhem herds retirees to home equity

Duncan Hughes   Reporter - The Australian
March 10, 2020 5 MIN

Plunging stock markets and minuscule bond yields are forcing increasingly desperate retirees to draw down on home equity in a scramble to boost income as retirement savings are squeezed ever harder.

Investors are panicking as they watch the S&P/ASX 200 index slump by almost 18 per cent since hitting a record on February 20.

At the same time, safe haven buying is pushing investors towards the bond markets, with the yield on the 10-year government bond at a fresh record low of 0.57 per cent.

Fears about the rapid spread of the coronavirus away from China are roiling financial markets, with a sharp slide in the oil price adding an extra layer of doom at the start of the week.

As companies face the prospect of frozen supply chains and reduced consumer demand from quarantined populations, dividend yield expectations are dwindling. Widely held banks are under special pressure from lower official cash rates, which eat directly into their net interest margins.

The Reserve Bank of Australia has stepped in to try and calm the turmoil, cutting the official cash rate by another 25 basis points last week. Interest rate markets are fully priced for another cut to the cash rate as soon as next month.

But falling interest rates penalise retirees who depend on income from cash at the bank or from term deposits. CBA, the nation's largest lender, has cut interest rates on some savings accounts by up to 30 basis points following last week's cut to cash rates.

Reverse mortgage push

Retirees are casting about for fresh ways to boost their income. Heartland Seniors Finance, an ASX-listed company that specialises in reverse mortgages, says demand for reverse mortgages has jumped by about 20 per cent in 12 months.

A reverse mortgage lets borrowers from the age of 60 convert the equity in their homes into cash. The amount of equity that can be released is calculated by the borrower's age and value of the property.

A borrower can receive funds as a lump sum, a regular income stream, cash reserve or a combination of all three, and the mortgage, interest and fees do not need to be repaid until their home is sold.

Brendan Ryan, founder of Later Life Advice, which advises people on living off retirement savings, said reverse mortgages are attractive for asset-rich, cash-poor retirees seeking an alternative source of income.

“This is a very viable source of income for older Australians,” says Mr Ryan, who recommends that retirees consider setting up a scheme to tap into their capital when needed.

“The costs of setting them up is low and the comfort from having them in place – without having to draw down income – is very useful,” he says.

Advisor reluctance

But terms and conditions vary widely between providers and many financial advisers are reluctant to recommend the schemes.

Paul Moran, principal of Moran Partners Financial Planning, said there are frequently no repayments made on a reverse mortgage and interest compounds, which means the borrower pays interest on the interest plus any fees or charges added to the loan.

“The amount borrowed can become substantial and significantly reduce expected inheritance, causing some estate beneficiaries to blame the adviser,” Mr Moran says.

Reverse mortgages are repaid when the house is sold, the last surviving borrower dies – if the mortgage is taken out as a couple – or the borrower moves into an aged care facility.

Improved regulation and rising property prices may allay retiree fears that they might lose their home or slip into negative equity, which means owing lenders more than the home is worth.

The government has strengthened regulation of the sector in a bid to improve consumer confidence and boost home equity as the third pillar of retirement income, after equity and fixed income. About 20,000 Australians are turning 65 every month.

The National Consumer Credit Act requires that a borrower must be shown – in person – how much the interest will amount to over the life of the loan and give the borrower a copy of the projections. The calculation must be made on an ASIC-approved website.

Nest Egg

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

Boomers in the nation’s largest cities 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 after Vancouver and Hong Kong.

“Retirees are worried about the low incomes their deposits generate. They are also worried that their falling super won't get them through retirement,” says Josh Funder, chief executive of Household Capital.

“Some savvy retirees also know that if you draw heavily on your super when it is down, it is hard for the super balance to recover with future growth,” adds Mr Funder.

“When superannuation is low and home equity is robust – that is the time when retirees are drawing on the third pillar of their retirement funding,” he says.

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 35.5 per cent.

Most lenders allow between 15 per cent and 45 per cent of a property’s value, with the amount increasing for older borrowers.

Borrowers need to consider the mix of interest rate, initial and break fees that best suits them. It is also important to contact the Department of Human Services on how any payments might affect pension benefits.

Aim for lower payments

Paul Dwyer, director of Reverse Mortgage Finance Solutions, advises borrowers to keep interest payments down by minimising the amount of equity that needs to be drawn down.

For example, interest rates vary from Household Capital’s 5.15 per cent to Heartland Seniors Finance's 6.2 per cent. Household Capital has an application fee of 1.5 per cent on drawn capital with no ongoing fees while P&N Bank charges $395 and an ongoing annual fee of $80.

Household Capital modelling shows properties in Sydney's gentrifying Redfern are likely to provide better long-term retirement funding prospects than Melbourne’s Toorak, according to new assessments of the long-term value of property.

“It is not a home price index – there are other indexes predicting next year’s values,” Household Capital's Mr Funder says.

Based on Household's analysis, Forrest, which is five kilometres south of Canberra’s central business district, tops the nation as the best postcode for drawing down equity during retirement. Its long-term prospects are boosted by high incomes and stable federal employment.

The average superannuation balance of someone aged over 60 in Forrest is about $210,000 and more than 75 per cent could on average tap home equity of about $322,000. The median price of a property is about $560,000.

Another top performer is Darling Point, about four kilometres east of Sydney’s CBD, where median house prices are about $5.6 million.

The average super balance of a Darling Point resident aged over 60 is about $415,000. More than 75 per cent of the postcode’s home owners could on average draw home equity of about $1 million.

Price volatility reduces long-term home equity prospects in many plush postcodes compared to their more stable but less expensive neighbours.

“Wealthy people in Toorak might have more home equity but volatile markets mean they might need to be more conservative about its management. Red Hill and Kew are more stable,” Mr Funder says.

The nation's top postcodes include: Forrest; Red Hill, about 84 kilometres south-east of Melbourne; Sydney's Darling Point, Eglinton, 44 kilometres north of Perth; and Bowral, 150 kilometres south-west of Sydney.

avg home equity by suburb

Original article on The Australian

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.

Multiple mugging survivor turns hand to helping retirees stretch resources

Damon Kitney   Victorian Business Editor - The Australian
March 8, 2019 5 MIN

Joshua Funder has been mugged twice in his life.

During a stint at the Boston Consulting Group in San Francisco in 2001, he was confronted in the street at gunpoint after hours of counting spinach leaves for the Dole Food Company.

A few years later, when working in Africa with the Clinton Foundation, he was running along a waterfront in the dark of night when he was cornered by six thugs with wooden clubs.

“I’d always preferred the clubs over the guns,” he jokes. “But getting mugged for counting spinach, you wonder why you are counting spinach. When you are mugged when you are trying to ship medicines across Africa to stop HIV, you don’t worry or ask why you are there. You get very clear ideas about whether your work is meaningful and worthwhile depending upon how you get mugged.’’

Funder’s work with the Clinton Foundation HIV/AIDS Initiative to reduce prices for antiretroviral medicines and initi­ate pharmaceutical supplies across eastern and southern Africa had a deep impact on the Rhodes scholar.

After spending the next decade as partner at GBS, Australia’s largest venture funds management firm — he left in January 2015 and three months later lodged a legal claim against the firm for unfair dismissal — Funder ran for pre­selection in former prime minister Bob Hawke’s old seat of Wills in Melbourne’s north.

Despite boasting the support of former Labor premiers Steve Bracks and John Brumby and former federal Labor minister Barry Jones, he was pipped at the post by current member Peter Khalil, a former security adviser to then prime minister Kevin Rudd.

In 2016 Funder started a technology company, its ambitions harking back to his experience in Africa.

“I wanted to do a good, big thing in Australia which met a net need,” he says of his firm known as Household Capital.

“It brings ­together a lot of my passions and experiences … Part of this story is re-using a useless PhD to innovate.”

Funder is joking about his PhD in intellectual property for biotechnology from Oxford Univer­sity, which he says “enabled me to dive into the academic actuarial literature on longevity and differential risk pricing of reverse ­mortgages”.

Over the past two years, Household Capital has been ­developing a series of complex ­algorithms and a technology platform designed to help Australian retirees balance their savings, ­continue to grow their assets ­during retirement and harvest a sustainable income from their ­investments.

Highlighting the breadth of Funder’s Melbourne contacts, the industry superannuation funds-backed ME Bank, rich-lister barrister Allan Myers, former federal superannuation minister Nick Sherry, former Macquarie Group executive Jim Miller, former Skilled Group chief executive Greg Hargrave and other high net worths have all become investors.

The idea for Household Capital, which essentially allows retirees to use equity in the family home to fund their retirement ­expenses, also stemmed back to Funder’s chairmanship of the progressive think tank Per Capita, which was established by technology entrepreneur Evan Thornley in 2007.

“We did a big program there on how to reframe ageing. Historically it was considered a threat, a cost and a grey tsunami. We were the first to lead the way in saying, ‘It is 30 years of life people haven’t had — it is to be celebrated’.’’

Household Capital has now produced a white paper analysing the dilemma of retired Australians — while 80 per cent own their own home, many still experience high levels of relative poverty ­because they can’t access the ­equity in their properties.

“The values behind the white paper have drawn together the board members, the advisory board members and the investors in this company,’’ Funder says.

Household Capital has established a $100 million wholesale debt facility with ME Bank that it will use to offer loans to retirees, ­allowing them to transfer a portion of the value of their homes into their superannuation fund or an investment account.

The critics have already decried the interest rate on the loan — 5.9 per cent — as being too high. One this week claimed the loan amount to be repaid would double and redouble every 12 years.

Household Capital receives an establishment fee to cover the costs of putting the loan in place and interest is charged on the capital drawn from a person’s home. The final amount is paid when the person leaves the home and the house is sold.

But Funder says the rates ­offered in the future will fall.

“Our main mission is to test a product that meets the needs of Australian retirees and then scale it. To pass on the benefits of scale to customers by offering increasingly lower rates at low margins. And to have a high-scale, low-margin business,’’ he says.

Other critics also describe the product as a “dressed up” reverse mortgage, which are now much harder to obtain from the big banks following an Australian ­Securities & Investments Commission review last year that found many borrowers were using them without understanding the risks.

But Funder argues the Household Capital model provides a low interest rate and low loan-to-value ratio, better customer experience and partnered distribution with ­financial advisers and superannuation funds.

“We won’t lend for the short-term consumption of equity,” he says. “This is accessing the money people have already saved, which is very different to paying off a mortgage or money that a bank has transferred to you. We have tried to innovate from the front end to the back end to reflect those structural differences.”

One of Household Capital’s ­advisory board members is Bob Officer, a former chairman of the Victorian Funds Management Corporation and a former director of Transurban and the infrastructure investment group CP2.

“Household Capital has pioneered a new approach to access home equity, providing a holistic and sustainable retirement funding solution,’’ Officer says.

Funder first met Officer in 2015, around the same time the former was writing a book titled Watson’s Pier about his great-grandfather’s role at Gallipoli.

Stan Watson was an engineer with the South Australian Railways and landed at Gallipoli on April 25, 1915 before being instrumental in building a pier that was critical in the extraordinarily successful evacuation of the peninsula in December of the same year.

Stan was 97 when he died. His great-grandson was then only 15.

“It was a way to think and write and reimagine Australian identity in history,’’ Funder now says of his book.

He remembers meeting Officer in the latter’s kitchen in 2015 to pitch the idea of Household Capital.

“Bob could see this was a new approach. He challenged my thinking. He thought it was a need that had not been met and this was an approach he thought would be worth giving a try,’’ Funder says.

Another Household Capital advisory board member is Peter Harris, the former chairman of the Productivity Commission.

Given his background in venture capital, Joshua Funder isn’t afraid of failure. But he feels the ­attitude in Australia towards entrepreneurs who are prepared to “give it a go” has changed from almost two decades ago when he was mugged in downtown San Francisco.

“I have kids and a mortgage. I have put three years of my life into this, a large part of it unpaid. I don’t fear for my reputation,” he says.

“Australia is a different place now and people understand that the risks in entrepreneurship are worth taking, even if it doesn’t work out.”

He says his goal with Household Capital is simple: to reconnect millions of Australian retirees with their own savings to fund 30 years of retirement.

“So they can flourish. We will add stimulus to the economy to meet people’s own needs. This will have a powerful effect on how our economy is retooled to meet a ­retiree’s lifelong consumption for their wellbeing,’’ he says.

“And I will be very proud to see that outcome.”

Original article on The Australian

Firm helps tap home equity to fund retirement

Damon Kitney   Victorian Business Editor - The Australian
March 5, 2019 2 MIN
 

The industry superannuation funds-backed ME Bank, rich-lister barrister Allan Myers and former federal super minister Nick Sherry are backing a new specialist retirement funding provider allowing retirees to use equity in the family home to fund their retirement expenses.

The firm known as Household Capital, which is also backed by former Macquarie Group executive Jim Miller, former Skilled Group chief executive Greg Hargrave and other private investors, has established a $100 million wholesale debt facility to provide funding for home equity at the same time as the big banks are rationing credit for mortgages.

“This is the first new major funding for home equity in Australia for more than a decade. It is an important step in making sure that over time we are able to supply the needs of retired Australians with a new asset   class which is Australian residential property securities,’’ said Household Capital chief executive Joshua Funder.

Mr Funder spent over a decade as a partner at GBS, Australia’s largest venture funds management firm, before establishing Household Capital two years ago.

Household Capital helps Australian home owners gain access to additional retirement funds by using a low interest rate loan to transfer a portion of the value of their homes into their superannuation fund or an investment account.

Household Capital receives an establishment fee to cover the costs of putting the loan in place and interest is charged on the capital drawn from a person’s home. The final amount is paid when the person leaves the home and the house is sold.

Mr Funder said Household Capital would charge customers an interest rate of 5.9 per cent.

“It is a pilot facility to test a new asset class which is fit for purpose, which we believe can scale into the billions of dollars to meet a market need, as we have seen overseas. You don’t meet the need if you don’t scale so the ambition of the company is put in place the foundations to enable it to scale,’’ he said.

The Household Loan is designed to meet the needs of Australian retirees by allowing them to balance their savings, continue to grow their assets during retirement, and harvest a sustainable income from their investments.

Mr Funder said that in contrast to reverse mortgages, which allow home owners to borrow against the equity they have built up in their property — typically for short-term reasons, which has led to them being heavily scrutinised by regulators — Household Capital uses sophisticated algorithms to combine a retiree’s home equity, superannuation and aged pension to provide a full, long-term picture of a borrower’s financial profile through retirement.

In addition to providing the wholesale debt facility, ME Bank has made a strategic equity investment in Household Capital, which has raised $6m in two private fund raisings over the past two years.

Nick Sherry, Household Capital chairman and former minister for superannuation under the Rudd government said while there was currently around $900 billion in untapped home equity owned by retirees, the average retiree’s super balance often lasted only 10-15 years into retirement.

“For many Australians, ageing in the home you’ve been living in helps maintain family and community networks and use of local services,” Mr Sherry said. “Selling the family home can result in loss of entitlement to the aged pension and the cost of buying and moving to a new home can mean significant loss of capital”.

“The substantial savings held by Australians in their family homes is a largely untapped resource that can be better utilised to help retirees live well at home”.

Original article on The Australian

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.