Reverse mortgages set to move forward
Posted on: 24 Feb 2017

Reverse mortgages set to move forward

Options for older house owners to tap into equity in their homes through reverse mortgages have more than halved in the past 12 months but that could be about to change.

A recent tightening of the pension asset test, volatile equity markets and low interest rates are expected to renew interest in reverse mortgages, particularly among property owning self-funded retirees, product providers predict.

Reverse mortgages use an owner's equity in their house to borrow money.

Taking the mantel of top provider of such mortgages based on interest, fees, service and income generated was Heartland Seniors' Finance, a reverse mortgage specialist, according to analysis from research company Canstar.

The number of reverse mortgage products fell from 10 to four during 2016, Canstar analysis reveals. There is an 18 basis point difference between the lowest and highest rate of 6.37 per cent.

More retirees are likely to be looking to supplement their pension income. Banks offer different interest rates, fees and features, which means the cost of a reverse mortgage can vary between providers. according to industry specialists.

A Productivity Commission into housing issues for older Australians has highlighted the importance of being able to tap into home equity to boost income and lower dependence on the public purse.

The number of providers shrank during the global financial crisis squeeze after allegations of high compound interest rates rapidly consuming housing values.

ASIC, the nation's securities regulator, warns a reverse mortgage is a complex product that can have a significant impact on finances, quality of life in retirement and family relationships because of concerns about its impact on inheritance.

Andrew Ford, chief executive of Heartland Seniors' Finance, attributes record business volumes to an ageing population, rising property values and increasing indebtedness.

For example, whether a loan is taken as a lump sum, regular income stream, a line of credit or a combination of these can significantly influence repayment, typically by an estate's executors.

Reverse mortgage interest compounds over time and is added to the loan balance.

Lenders do not offer fixed rates, which means costs can vary during the term if rates rise or fall.

The amount that can be borrowed varies between lenders. Typically, those aged 60 can borrow up to 15-20 per cent of the value of their house. It rises by about 1 per cent for each year older than 60 and caps around 45 per cent of home value.

Other companies offering mortgages include Macquarie Bank and Bank of Melbourne. New entrants are believed to be developing products for launch later this year.

Source: AFR