Reverse mortgage products are here to stay and so are the risks to advisers selling these products.
These risks have not been tested in the courts yet because the products are still in a ‘honeymoon’ period.
Problems will arise when dependants become aware the desirable family home that they assumed they were going to inherit is going to be sold to meet the requirements of the reverse mortgage.
The key to avoiding being sued by the dependants of the client is getting the children involved.
However, this is not always easy, as some parents insist on keeping the children in the dark.
Synchron director John Prossor says when the client insists on not telling the children, it does increase the risk.
“Then there is the problem of the three children in Australia are told, but nobody informs the fourth who lives overseas,” he says.
Collins House Financial Services managing director Dominic Alafaci says it makes sense to involve the kids in the decision, but the adviser can only suggest this to the client.
“The client may not think about the impact it will have on the kids and how it may upset them,” he says.
“But at the end of the day, it is what is important to the client and what is driving their decision on whether to use a reverse mortgage or an alternative solution for their financial needs.”
Bluestone Equity Release chief executive officer Peter McGuinness agrees involving the children is a key point to avoid future litigation.
“We always contact the client of a reverse mortgage if it has come to us from a third party and ask them if they have discussed the move with the beneficiaries of their estate,” he says.
“We are not trying to go behind the back of the adviser or broker, just making sure all of the family understands what is happening.”
McGuinness says more than 95 per cent of their clients have talked to the children about what they are going to do.
“Often we find it is the children who have suggested the idea of a reverse mortgage to their parents,” he adds.
However, it may not be the children that are the problem in the future, as Matrix Planning Solutions national marketing manager Geoff Martin explains.
He says with parents living longer, the problems may arise with grandchildren who thought they were going to inherit the family home.
“Their parents may be in their 60s and passed on their claim to the home to the grandchildren, so the adviser has to think about longevity of the grandparents when dealing with a reverse mortgage,” he says.
“If this hasn’t been thought of, the decision may be challenged in court, so it is seller beware.”
The longevity problem may mean it is not the adviser who sold the product in court, but their successor or licensee.
“It will get messy when these products hit the courts one day in the future,” Martin warns.
Longevity is a key risk area for advisers down the track in a variety of ways.
“We have talked about the reverse mortgage lasting the average lifespan plus five years, but people are living longer,” McGuinness says.
Homesafe Solutions director of marketing Jason Webb says his company has come up with a different solution to the longevity problem.
“A reverse mortgage is where a loan is taken out on the home which will be repaid with interest when the person comes to sell the house,” he says.
“We offer equity release, which is not a loan, but a sale of a percentage of the house to us which will be fully realised on the final sale.”
While a reverse mortgage operates with little trouble in a rising housing market, and interest rates stay within reasonable limits, problems can arise if this is spread over a long period.
Webb says there are a lot of assumptions that all house prices will rise, but a lot depends on the state of the property.
“There is insurance to protect the borrower against the amount of the loan exceeding the value of the house, but these policies have maintenance clauses,” he says.
“Currently, most require the property to be valued every two years, which is also designed to ensure the property is in good condition.
“However, the lack of maintenance during this period between valuations could trigger the default clause in the policy, which means the home could be sold, at a lower price, against the wishes of the family.”
Webb says while at this stage everybody in the reverse mortgage industry is friendly, the client’s longevity may change this.
“The company that provided the original loan may not be the current owner and is looking to recoup their outlay, which now may exceed the value of the home,” he warns.
The equity release model does not require valuations as the lender takes the risk of the house being worth more on sale with the family.
Webb admits in the future some properties will be worth less and that is a risk the company, which is part owned by Bendigo Bank, will bear.
“We are working on the principle that the land component of the house will rise in value and that will provide the capital growth in the future,” he says.
“All we require is the house is insured, as we are looking at the longer term view to maximise our value.”
The occupiers also remain the legal owners of the home and Homesafe has no powers to enforce a sale at any point other than when the owner wants to sell.
The percentage of the home bought by the company (up to 30 per cent) is put into a property trust, so the risk is spread among a number of properties.
Webb says the trust may be offered to retail investors at some point in the future, although there are no plans to do so in the short term.
