Reverse mortgage demand surges as cost of living hits retirees

Cash-poor retirees are tapping into equity in their homes through reverse mortgages to cover rising living expenses as the industry tries to improve its tarnished reputation following the withdrawal of major banks.

As the population ages, policymakers are keen to encourage retirees to draw down on their wealth to fund their incomes, and Treasury’s Retirement Income Review of 2020 drew attention to reverse mortgages as an option.

Helia chief executive Pauline Blight-Johnston (left) and Household Capital chief executive Joshua Funder.Credit:Kate Geraghty

Reverse mortgages are loans that allow people aged in their 60s or older to borrow against the equity in their home and not repay the lender until they move out, sell the home, or die.

Major banks stopped selling this type of loan last decade, amid concerns about the risk to their reputations. A 2018 review by the corporate watchdog said reverse mortgages were playing a role in helping older Australians, but lenders had failed to consider the risks of the products, such as how retirees taking out the loans would afford future costs, such as aged care.

As the cost of living rises, and a government-provided reverse mortgage scheme grows in popularity, specialist lenders are reporting increasing demand for the products.

Dr Joshua Funder, chief executive of reverse mortgage provider Household Capital, said there was growing awareness of the product, which people saw as a way to maintain or increase their income in the difficult economic climate.

“The volume of our portfolio has grown 100 per cent year-on-year, despite interest rates being unprecedented in their rise in the last 30 years, and our new originations are growing strongly,” Funder said.

Rising interest rates and falling house prices mean reverse mortgages – which have higher interest rates than normal home loans – will erode a borrower’s equity faster than otherwise.

But Funder said customers were being cautious in how much they borrowed, saying some might draw down an extra $1000 a month to help cover rising costs.

“We’re seeing people be very careful about meeting their non-discretionary needs and cost-of-living increases, and leaving themselves home equity that will be available in the future to meet their needs regardless of interest rates and home prices,” Funder said.

Mortgage insurance giant Helia, previously called Genworth, moved into reverse mortgages last year by taking a 22 per cent stake in Household Capital and forming a strategic alliance with the business.

Retirees are accessing equity in their homes to cover rising everyday expenses.Credit:Michele Mossop

Helia chief executive Pauline Blight-Johnston said it was an attractive market in part because it was under-served because banks did not want the reputation risk that came from “getting it wrong”.

“If you don’t do this type of mortgage very well, there’s a very big reputation risk, and that’s really hard to control when you’ve got thousands of employees and representatives having conversations right across the country,” Blight-Johnston said in an interview alongside Funder.

The largest player issuing this type of loan, New Zealand-based Heartland, told the market last month its Australian reverse mortgage portfolio jumped 20 per cent in the latest half to $1.3 billion.

‘If you don’t do this type of mortgage very well, there’s a very big reputation risk.’

It cited “increased debt consolidation and cost-of-living requests” as a key driver, alongside demand from retirees using the money for “modest lifestyle spending” such as on holidays or new cars, following an end to COVID-19 lockdowns.

It also said the federal government’s Home Equity Access Scheme, which provides limited reverse mortgages, had raised awareness.

Jarden analyst Grant Lowe said Australia’s reverse mortgage market had probably been growing because of a “demographic tailwind” and the federal government’s involvement in the sector.

“From a perception perspective, you would expect that that would provide some sort of credibility to the whole idea of home equity release,” Lowe said.

Lowe said the fact banks had quit the market created an opening for smaller lenders, and he noted comments from Heartland that the rising cost of living was driving some people to use reverse mortgages to cover household expenses.

“There will certainly be a range of different circumstances. But rather than people taking out $50,000 to $100,000 to buy a new boat, there has likely been an increase in people drawing down regular payments to fund cost-of-living increases,” he said.

In 2012, Australia tightened regulation of reverse mortgages by introducing “no equity guarantee”. This means a borrower’s accumulated interest cannot exceed the value of the house, and they can live in the property until they die or move out.

The Australian Securities and Investments Commission’s MoneySmart website says consumers should get independent advice before taking out a reverse mortgage. These products can affect a customer’s eligibility for the pension; their ability to afford future expenses including aged care; and what they leave to others when they die.

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