Client knowledge gap makes reverse mortgages problematic
Reverse mortgages may be a useful product for ageing Australians, but a new Australian Securities and Investments Commission (ASIC) report has found that they are still problematic and that the market remains highly concentrated.
The ASIC Review, released today, found that borrowers had a poor understanding of the risks and future costs of their loan, and generally failed to consider how their loan could impact their ability to afford their possible future needs.
It found that lenders had a clear role to play in better informing and educating borrowers in circumstances where ASIC’s examination of nearly all loan files suggested borrowers’ long-term needs or financial objectives where not being adequately documented.
The ASIC report suggested that the 2012 legal protections ensuring borrowers could never owe the bank more than the value of their property had been effective but noted that this objective had been compromised by factors such as the timing of a loan, how much was borrowed and the economic conditions.
Commenting on the findings, ASIC deputy chairman, Peter Kell acknowledged the benefits that reverse mortgages could deliver in achieving better quality retirements but said the regulator’s review had shown that lenders and brokers needed to make inquiries that would lead to a genuine conversation with customers about their possible future needs, not just a set of tick boxes on a form.
He said the ASIC report had also found that there was an opportunity for lenders to reduce the risk of elder abuse because under the new Code of Banking Practice, recently approved by ASIC, banks would be required to take extra care with customers who might be vulnerable, including those who were experiencing elder abuse.
The review found that consumers also had limited choices for finding a reverse mortgage in circumstances where several providers withdrew from the market after the global financial crisis.
It noted that from 2013 to 2017, two credit licensees provided 80 per cent of the dollar value of new loans.
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