Household Capital looking to securitise up to $10bn of reverse mortgages

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Equity release lender Household Capital is planning a A$1 billion securitisation program to help fund surging demand from retirees for its reverse mortgage products.

The securitisation is expected to be launched next year and will be one of the largest ever domestic funding programs backed by Australian residential reverse mortgages.

Household Capital founder and managing director Josh Funder said he was eyeing follow-up securitisation programs, with a view to raising up to $10 billion of funding in coming years.

“The objective here is that we want to deliver $5 billion to $10 billion of funding capacity for the business,” Funder told Banking Day.

“Our portfolio is growing at 50 per cent year-on-year and while we raised additional debt funding earlier this year that capacity is expected to be filled by the middle of 2024.”

In August, Household Capital secured $600 million in fresh wholesale debt funding after winning support from IFM Investors, Citi and Pacific Equity Partners.

Securitisations underpinned by reverse mortgages have become rare in Australia since the Global Financial Crisis.

Heartland Bank’s Australian arm launched a $142 million program in September 2020 that was arranged by Macquarie Bank’s structured lending team, but it was pitched exclusively at overseas institutional investors.

In the last 12 months equity release providers have enjoyed booming demand for their products as residential property assets breach records and retired Baby Boomers move to supplement their government pensions.

Household Capital appears to be the fastest-growing player in the Australian market although the claim cannot be verified because it does not publish financial accounts.

Heartland last year boosted the size of its Australian reverse mortgage receivables book by $264 million to $1.54 billion.

This equates to a growth rate of 21 per cent – much less than Household Capital’s declared rate of expansion.

The reverse mortgage sector has undergone a cleanout since 2012 when the federal government overhauled consumer credit laws to stamp out crooked lending practices and unfair terms and conditions.

Heavy regulation of the sector by ASIC appears to have shaped the risk metrics of equity release receivables books managed by Household Capital and Heartland.

The average contracted loan-to-value ratio of an Australian reverse mortgage marketed by both lenders is around 20 per cent, which given the relentless appreciation of residential property unlocks up to $250,000 for retired homeowners.

Demand for reverse mortgages appears to be intensifying as retirees re-assess their lifestyle needs in an inflationary environment.

“Australia has very high property valuations and lower loan-to-value ratios for equity release mortgages,” Funder said.

“These are the lowest risk mortgages in Australia and they are directly regulated by ASIC.

“In many cases an equity release loan can double a retired couple’s superannuation – it can transform their retirement.”

While regulation of the sector has been more vigilant in the last decade, critics of the reverse mortgage sector say they remain risky for borrowers and investors, particularly in an environment of persistent rate rises and falling property prices.

Reverse mortgage borrowers can elect to service monthly interest on their loans or have the interest added to their loan debt.

This article was published in Banking Day.