ASIC points to worrying trend in reverse mortgage use

The Australian Securities and Investments Commission (ASIC) has warned of the risks of using reverse mortgages, including the concerning practice of consumers being encouraged to draw down more income than they actually need.

ASIC chairman Tony D’Aloisio said while equity release products can provide benefits, they can also have significant risks. He said the regulator’s research had found consumers find it difficult to understand equity release products.

“One of the big challenges is how to estimate the long-term cost of reverse mortgages and ensure there is enough equity left to fund future needs,” D’Aloisio said.

“We’re also concerned that people are sometimes encouraged to borrow more money than they actually need, ultimately at a greater cost to them.”

D’Aloisio said the decision to use home equity as a source of income represents “a big step, involving what is probably their most valuable asset”.

Paul Clitheroe, chairman of the Australian Government Financial Literacy Board, also reminded consumers that an equity release product is only one option available to create additional income streams.

“Using your home equity now could significantly limit your choices if you need money in the future,” Clitheroe said.

The regulator has launched an investor guide to using reverse mortgages and other equity release products. The guide provides information on the risks and costs of equity release products, information relating to terms and conditions, as well as information about alternatives to equity release products.

ASIC said the guide also provides case studies to illustrate the costs of equity release products, the effect of fees and what happens when consumers access more equity from their home than they need.