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Lender Household Capital targets untapped reverse mortgage market

The way Joshua Funder sees it, the banks have abandoned old people opening the door for his Household Capital which is now working with Citigroup to securitise its $450m reverse mortgage book to expand its balance sheet.

Reverse mortgages are not new but for the battle-scarred banks it is perceived as exposing them to reputation risks, explaining their absence.

This financial year the industry is expected to write $1bn in new equity release loans, the biggest since 2007, but tiny compared to the CBA home loan balances at $577bn, the estimated $7 trillion value in Australian homes and $1 trillion owned by retirees.

The flip side is the mortgages being placed by Funder have a loan to value ratio of just 20 per cent against the 80 per cent the banks start with on new home loans and with 2500 families on his book the four year old company is growing at 100 per cent a year.

Demographics and cost of living pressures tell you the home equity market will be growing fast as more people prefer to stay in their old home but maybe wants some more money in retirement either for their own lifestyle or to play mum and dad bank for their children’s first home.

As living costs rise some retirees are cash poor and asset rich.

Household Capital is 30 per cent owned by insurance giant Legal & General and 20 per cent by Helia (formerly Genworth) and has $600m in wholesale funding from IFM, Citi and private equity house PEP.

When the Federal Government stepped up its home equity package offering lower rates than offered on the market it provide some validation to the market while posing obvious competitive risks, being a low cost funder.

The concept is if you own a $1m house, you borrow $200,000 at 9.2 per cent but you don’t have to pay the money back until you sell your house.

Assuming the house increases in value by five per cent a year at age 65 you owe $200,000 with $800,000 of equity.

When you are 80 the value of the house would increase to $2.1m, your ownership has fallen from 80 to 62 per cent and you owe $790,000 but the equity is now $1.3m.

If the rate is seven per cent then by the time you are 80, you will own 73 per cent of a house worth $2.1m, you will owe $569,789 and the equity will be $1.5m.

The interest rate risks are obvious as are generous house price appreciation forecasts which explains why the banks are not keen on potential television appearances taking control of a pensioners house.

The banks exited the wealth market after suffering a regulatory backlash culminating in the 2018-19 Royal Commission.

Banks have lost control of home loan customers to the brokers who handle 71 per cent of new loans and while their trepidation to enter the reverse mortgage market is understandable there is $3.5 trillion in superannuation and another $1 trillion in home loans so the gap being filled by Household Capital’s Joshua Funder is another opportunity lost.

This article was published in The Australian on 1 December 2023.

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