Can the reverse mortgage sector reverse its fortunes?

With shrinking planner interest and very few product suppliers left in the market, the reverse mortgage sector is screaming for attention, Andrew Tsanadis writes. 

It’s no secret that a significant number of Australia’s retirees will not have enough money to see them through to the end of their autumn years. 

Alternatives to funding the ageing population, however, have long caused debate within the financial services industry, and one of the most divisive of these products is the reverse mortgage. 

It is also clear that recent Government action – or inaction, depending on who you ask – has once again brought these equity-release products back into the industry spotlight. 

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Reverse mortgages are the only form of equity-release product currently available nationally, but they have been largely ignored by financial planners and mortgage brokers since the global financial crisis (GFC). 

In that time, the supply chain for these products has been rocked to the point where very few providers remain active. 

Experts agree that a lack of product innovation has also stalled any significant market resurgence. Despite this there is some speculation that there are better times to come for the sector. 

The market as it stands 

According to Senior Australians Equity Release Association of Lenders (SEQUAL) chairman John Thomas, almost four years on from the GFC there are simply no non-bank lenders writing new loans. 

While the likes of Bluestone, Australian Seniors Finance and Over Fifty Seniors Equity Release are either maintaining their current books or updating loan arrangements for current customers, the major banks are supplying the majority of the market. 

Largely speaking, they are the Commonwealth Bank, Westpac, St George and Bankwest, Thomas said. 

“There are those that have withdrawn and are not doing anything. For example, Macquarie (Bank) closed down their book a couple of years ago and they now maintain those loans,” he said. 

In November 2012, Macquarie Group purchased ABN AMRO’s $350 million portfolio of reverse mortgages, but it remains to be seen what it means for that portfolio. 

In its latest report on the sector, Deloitte – in conjunction with SEQUAL – found that the reverse mortgage market had reached $3.3 billion as at 31 December 2011, growing at a rate of 10 per cent per annum. 

Thomas said it was important to bear in mind that the survey findings take into account not only new business written but the compounding interest of equity-release products as well. 

Despite this, he expected the market to continue to increase at around the same rate, and it was fair to say that demand for these products is currently outstripping supply. 

Major institutions may not have many restrictions in relation to contract terms, but customers simply don’t have the same variety of choice as they did pre-GFC. 

The demographic profile for those taking up equity-release products has remained largely stable, according to the last few SEQUAL surveys – couples between 70 and 75 years of age who have accumulated wealth through home ownership (around 50 per cent of respondents). 

In recent times though, the survey has consistently shown that it is younger retirees – those aged between 65 and 75 – who are accessing these types of products as well as those aged 85 or over. 

According to Deloitte banking partner James Hickey, borrowers are using the funds very much for the purposes of home improvement, travel and supporting their income in the early stages of retirement if they’re not quite ready to dip into their super savings. 

The fact that early, more active retirees are accessing these products shows their validity at all stages of retirement, he said. 

According to SEQUAL, the average size of loans has gradually increased year on year but has been sitting around the $70-80,000 mark for the last 12 to 18 months. 

Hickey said the more significant trend is that borrowers are generally drawing down only around 70 per cent of what they’re entitled to from the available facility at the point of settlement. 

It suggests that most borrowers are only drawing down funds for specific purposes rather than using the money for saving purposes, which can potentially be classed as an asset by the Australian Taxation Office (ATO).  

Following amendments made to the National Consumer Credit Protection Act 2009 (NCCP) in August 2012, lenders will be required to demonstrate the potential outcomes of compounding interest on a reverse mortgage. 

While the regulator has often touted this risk, Hickey said the reverse market has never been overly price sensitive and it is not necessarily a deciding factor in the take-up of the product by customers.

More often than not it is the outcome of having a needs-based discussion with a lender/mortgage broker or financial adviser that is the deciding factor. 

Referring to a Deloitte survey of the top 30 financial planning dealer groups undertaken pre-GFC, Hickey said many of the lenders that made it onto approved product lists (APLs) at the time were no longer active. 

He said this is why there hasn’t appeared to be interest from planners in recommending these products. 

In addition, many of the marketing and education campaigns for these products has fallen away with the dwindling number of suppliers. 

However, according to Kevin Conlon, DomaCom general manager, business and professional development and former SEQUAL CEO, Australia’s current demographics dictate that equity release is a legitimate retirement planning tool. 

“At the end of the day we’ve got the first of the baby boomer cohort moving into retirement as of last year,” he said. 

“That particular part of our generation is the largest part of the population today and (most of them) are asset rich and cash poor.” 

At the national level, he said it’s clear that the pension isn’t going to be the answer for meeting post-retirement living standards. 

Risks and stigma 

The most recent SEQUAL report found that the number of customers preferring to go direct or through a financial planner or mortgage broker had been split very much down the middle. 

Deloitte’s survey results showed that direct sales were the largest channel in 2011 at 74 per cent, compared to brokers and planners at 26 per cent. 

“I think since the GFC, there’s been a slight change of attitude by planners – some of them didn’t want to know reverse mortgages (because) there wasn’t enough reward in it,” Thomas said. 

With so many super funds returning poorly, Thomas said he expected product development to increase because the opportunities for funding aged care in the future are “virtually unending”. 

Hickey said the survey findings often masked the fact that planners themselves are not usually accredited to write the loan and will use a broker. 

“From a lender’s point-of-view, that’s seen as a mortgage broker-originated lend when in fact it was the planner who sits behind the customer who has advised on the sale,” he said. 

SEQUAL has long regarded reverse mortgage facilities as the ‘fourth pillar’ of retirement planning rather than a last resort source of funding. 

Certainly in the years following the GFC, planners recognised the need to have a balanced perspective on broader wealth assets in the retirement planning process, rather than focusing just on super. 

A recent study by REST Industry Super found that of the 1200 baby boomers surveyed, around a third felt they were financially unprepared for retirement. 

In spite of this, Conlon said it is most often the case that retirees want to remain in their homes throughout their retirement, albeit while trying to find solutions to extract some of the wealth that they have accumulated through home ownership. 

According to Reserve Bank of Australia statistics pertaining to real growth of Australians’ average household wealth from June 1988 to June 2012, dwellings comprised about 70.1 per cent of Australians’ personal wealth.

This compares to 30.4 per cent in the US over the same period (based on US Federal Reserve figures over the same period). 

 “It’s more than the bricks and mortar - it’s the engagement with the social network where these people have settled. I think equity release is an inevitable solution given those factors,” Conlon said. 

The role of advice 

There is very strong investor resistance to getting formal advice around equity release transactions, and the current preference for going direct supports this. 

Conlon said he supports the concept of investors being fully advised before entering such contracts – but the challenge is in ensuring that this type of advice is scaled and priced accordingly. 

“In other words, that advice has to become accessible or otherwise it won’t work.” 

The reason most people access these products in the first place is because they are in desperate need of funding and can neither afford, nor have the need for, a full financial plan at that particular stage in their life, National Information Centre on Retirement Investments director Wendy Schilg said. 

For instance, Lifetime Planning’s Anna Lawton uses reverse mortgages specifically for the purposes of assisting her clients fund the move to aged care. 

Due to the sheer lack of product choice in the market at the moment, the majority of reverse mortgage contracts require the owner of the residence to reside in the property in order for them to apply for a mortgage.  

“So when someone moves into aged care clearly that’s a breach of the contract - for some people, retaining the home is absolutely paramount for the person going into care because it might be for estate planning reasons,” she said. 

Although Lawton was able to find a provider that offered such a contract following the collapse of her previous supplier Banksia, the loan-to-value ratio is considerable and the maximum amount a person can lend is restricted. 

“If we had more choices then we would certainly help more people facilitate (equity-release arrangements),” she said. 

Reflecting the attitude of most of her peers, Unified Financial Services director Michelle Tate-Lovery said she wouldn’t feel comfortable with recommending equity-release type finance “until all other possible options had been exhausted”. 

If the advice process were to proceed, Tate-Lovery said it was important for children to be made aware of the impact on their parent’s estate and that the responsibility for the loan may fall back on them if their parents live a long life and require aged care. 

Regulatory development 

Since 1 March 2013, licensees of lending facilities have been required to undertake thorough due diligence by providing customers with projections of the value of their property that may a become reverse-mortgaged property.  

In September last year, the Government also introduced statutory ‘negative equity protection’ on all new reverse mortgage contracts.

This means a customer cannot end up owing the lender more than the market value of their home. These draft amendments to the National Consumer Credit Protection Act have since passed into law. 

Conlon argued that, having learned from the UK market, reverse mortgage providers in Australia had always provided the “no negative equity” guarantee and the Government had simply legislated it from the self-regulatory initiatives that had been introduced by SEQUAL. 

“I think it’s critical that regulators acknowledge self-regulatory initiatives where it has genuinely delivered consumer protection, and look to fill the gap between that position and where the regulators want to see consumer protection,” Conlon said. 

He said the Government should also recognise the significance of the personal wealth that is tied into personal property. 

In saying that, he does not agree with the Productivity Commission’s recommendation – from its August 2011 inquiry report into the aged care system – that the Government should establish an Australian Aged Care Home Credit Scheme. 

“When I was (SEQUAL CEO), our position was that the Government really had no place to be a provider of equity release products, but they had a more significant role to play in ensuring that there was an opportunity for industry to respond by developing products that were appropriate to that challenge,” he said. 

The alternatives 

Although the majors have kept a hold on the reverse mortgage facility market in the last few years, industry experts agree that there has been a continuing lack of product development in the sector preventing any reasonable take-up by Australians in need of extra retirement funding. 

According to Thomas, this has largely stemmed from the fact that innovation in the past had been pioneered by the non-bank sector, most of which no longer has nearly the amount of funding required to undertake such projects. 

One non-bank equity release provider offering an alternative to accessing equity release products is DomaCom.  

According to Conlon, the business’ involvement in the senior equity-release space is almost accidental in that the aim they have is for equity release to help tackle the issue of SMSFs’ overweight positions in property. 

While an average asset allocation theory dictates that an SMSF should be weighted at about 20 per cent into property, Conlon said this proves to be impossible when an average SMSF balance sits at around $1 million while a single residence will cost upwards of $450-550,000. 

“If we’re looking at the supply of properties into the platform that SMSFs would invest in, one very obvious cohort is the home-owning senior who wants to stay in place and progressively sell down part of their property,” he said. 

Although Thomas acknowledges that the business is targeting the SMSF market, it is yet to be proven whether SMSFs are going to respond as strongly as they have to more traditional forms of property investment. 

Conlon sees DomaCom’s offering as the first of many that matches the needs of those most vulnerable in retirement, rather than the more traditional commercial bank interest-bearing debt options. 

Education and training 

SEQUAL has had its own reverse mortgage calculator for many years. Next month it will launch a new segment of its member training program, based around the Australian Securities and Investments Commission (ASIC) MoneySmart reverse mortgage calculator. 

In the past, its education program had been concerned with the technical aspects of reverse mortgages, but Thomas said the revamped program – in partnership with financial services training provider Intellitrain – will have modules focused on aspects of the product that most concern consumers, including the compounding interest of loans and the alternative forms of equity release that exist. 

“The program is designed principally for those that would deliver home-equity release such mortgage brokers and planners, but solicitors and accountants can also get involved in it – and even the consumers themselves,” he said. 

According to Thomas, the regulator’s approach is really a “mirror” of SEQUAL’s current code of conduct and will not do much to change retirees’ attitudes towards reverse mortgages. 

“As with anything, if it’s got an ASIC label or a Government label, it probably gives people a little bit more confidence,” he said. 

In relation to the calculator, Conlon said he doesn’t believe the regulator is the most appropriate source of consumer advice and would much rather see the Government step up its effort on funding financial literacy programs and non-government associations. 

According to Schilg, the National Information Centre on Retirement Investments (NICRI) is receiving about three to five calls a day from people thinking about buying into some sort of equity-release product.

The majority of the calls, however, are from consumers who have little to no understanding of the equity contract they signed up to in the first place and were now seeking financial guidance, she said. 

While she doesn’t necessarily have issues with the fact that most customers prefer to go direct, the problem is most people are not getting basic information on the product. 

“MoneySmart is quite a good website, the equity release part of it is OK, but most people at that age don’t want to read information on a website,” she said. 

Schilg noted that NICRI’s information service is being Government funded for the next 12 months but after that – in light of a potential leadership handover – the future of the program is in the dark.  

Recently, NICRI proposed the establishment of an information centre just for equity release in order for consumers to access individualised and independent financial information. 

The need for free independent information is also exacerbated by the fact that MoneySmart does not currently have the facilities to offer forward projections on so-called ‘second generation’ equity release loans such as DomaCom’s offering. 

The future in reverse 

Thomas said he expects the Government to encourage the use of equity-release products for aged-care funding as the vast majority of Australia’s labour force enters retirement age. Although it will be gradual, funding will definitely come back to this sector. 

“I think we’ll see other entrants in varying forms – not always large,” he said. 

According to Thomas, some credit unions are contemplating providing funding for these types of products – particularly for those people who have been customers for years and require different financial products for their autumn years. 

It was only just before the end of the 2012 that Australian Seniors Finance stopped writing new loans and Thomas – who is chairman of the company – said it remains to be seen when this will restart. 

“We’re certainly talking with funders and I’m pretty sure the funding will become available, but I don’t know how long it will be,” he said. 

Prior to the GFC, it was the competitive tension between the major banks and the specialist lenders that delivered a good reverse mortgage market in Australia. 

That’s according to Conlon, who added that the likelihood of non-bank product providers re-entering the market was next to none – unless the “Government understands the need for that competition to exist and they actively participate in encouraging the market to evolve”. 

Industry experts agree that it’s a tough call for a number of majors in the market to start writing again, considering the fact that they generally make up a small part of their overall business. 

“There’s some very significant reputational risks associated with accessing the seniors market and combining what ASIC quite correctly described as a somewhat vulnerable consumer with somewhat unfamiliar products,” Conlon said. 

In saying that, he said there is a generational shift around people reconsidering the family home as an active asset rather than simply an illiquid depository of wealth. 

Considering the post-Baby Boomer generation, they too have high levels of property ownership and it is inevitable that equity release will become part of life planning and retirement funding, he said. 

“Rather than imposing our opinions on whether or not equity release is a good idea, I think we need to get behind the challenge of ensuring these consumers are well-placed to make informed decisions,” he said.