11 Mar, 2020
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.
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.”