13 Nov, 2019
Reverse mortgages set to slip into top gear as Baby Boomers retire
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.