A reversal of fortune for reverse mortgages?

The cost of the age pension keeps growing, but so does the value of housing assets. Could this lead to more demand for products like reverse mortgages that let seniors access the value of their homes?

Pension costs rising

The population is getting older and people are living longer, which means that maintaining the age pension will be an ever-increasing challenge. Consider these facts: [1]

• For every person over the age of 65 today there are about 4.5 people of working age: in 1970 there were about 7.5 people. By 2055, the ratio is projected to be 2.5.

• When the Commonwealth age pension was introduced in Australia in 1909 the average male life expectancy was 55 and the qualifying age for the pension was 65: a person born today could expect to live past the age of 91.

• The cost of the age pension increased by 35% in real terms between 2007-8 and 2014-15. It is the largest single payment made by the Federal Government. At over $40 billion a year, it is twice the cost of Medicare.[2]

Housing assets

On the other hand, 75% of age pensioners own their home, and the total value of owner occupied properties without a mortgage per household is about four times larger than the value of superannuation savings per household.[3] The boom in property prices in many parts of Australia has inflated the value of these property assets, which are of course tax free for owner occupied properties.

Reverse mortgages

A reverse mortgage is one form of equity release product. It’s a loan secured by a mortgage with no regular repayments that does not have to be repaid until the borrower dies and/or the property is sold. Interest is capitalised, and so over time the debt may extend well past the amount of credit originally provided.

In 2012, special consumer protection provisions were introduced for reverse mortgages regulated by the National Credit Code. These protections were intended to make reverse mortgages safer for consumers, but that does not seem to have translated into growth in this market: in recent times, growth in reverse mortgages has been slow, after a period of expansion in the mid-2000’s.[4]By contrast, there has been recently a big jump in demand for interest-only home loans. From 2012 to 2015, the value of interest-only home loans approved by ADIs increased by about 84%, compared to 20% for principal and interest loans.[5] In the March 2015 quarter, interest-only home loans for ADIs made up around 42% of all new home loans.[6]

Regulation

There is not much published in Australia about the regulation of reverse mortgages, so we prepared a free briefing paper, Regulation of reverse mortgages in Australia, which details the requirements in the credit legislation. You can access the paper here. Some of the key provisions in reverse mortgage regulation are:

• A no negative equity guarantee, which basically means that the borrower can never owe more than the value of the property.

• If the contract allows the borrower to occupy the property or nominate someone else to occupy the property, the nominated person has the same rights as the borrower to occupy the property, and the borrower has the right to revoke a nomination. If the contract doesn’t give a protected tenancy right, the borrower must be informed before they sign the contract.

• Borrowers must be given additional disclosures about the reverse mortgage and how it works.

• Reverse mortgage loans will be deemed to be unsuitable (unless the contrary is proved) if they go over certain loan to valuation ratios (LVRs), which increase depending on the age of the borrower when the contract is entered into. For example, an LVR over 30% will be deemed unsuitable if the borrower is 70 when he or she enters into the contract.

• Certain types of default events are banned, such as a default under another loan with the credit provider.

• The credit provider must speak with the borrowers, their lawyer or attorney after issuing a default notice.

Full details of these requirements can be found in our briefing paper.

Patrick Dwyer

Legal Director

[1] The Age Old Problem of Old Age: Fixing the Pension, Centre for Independent Studies Research Report, April 2015 (“CIS Report”) p 17.

[2] CIS Report p 1.

[3] CIS Report p 21.

[4] CIS Report p 24.

[5] March 2012 quarter to March 2015 quarter. See ASIC Report 445, Review of Interest Only Home Loans, August 2015 (“Report 445”), p 21.

[6] Report 445 p 21.