This a question that an increasing number of people are beginning to ask themselves in the current economic climate. With the cost of living continuing to rise, and the prospect of any rise in the government aged pension looking very unlikely, more and more people are seriously considering equity release and reverse mortgage finance.

If you own your own home, and are over 55 years of age you may qualify. However, it will also depend on where your house is located and how much it is worth.  You can take funds as a lump sum, monthly instalment or line of credit and in many cases the loan can be structured so that it does not affect your pension.

The NSW Department of Fair Trading consumer survey on reverse mortgages provides a mixed bag of news for the industry and consumers.

On the one hand, the results show there is a significant un-tapped market with 48% of respondents indicating they would take a reverse mortgage some time in the future. This will gladden the hearts of lenders and provides further evidence, if any were needed, that there is a clear long-term need for these loan products in Australia. However the low existing take-up rate (only 3% of respondents had previously had established a reverse mortgage), indicates that most people still do not comprehend how reverse mortgages can be used to improve quality of life in retirement. 

(These statistics are broadly similar to previously published industry data, and probably within the acceptable range of ‘margin for error’ given the size and methodology of the survey)    

In addition, the fact that 20% of respondents were still not aware of reverse mortgages- even after 5 years of active product marketing by the industry - is somewhat disappointing. On an individual level, the results indicate many people continue to needlessly struggle with money, simply because they are not aware that a reverse mortgage provides them with another financial option.

From an industry perspective, the survey shows that there is still more work to be done in raising public awareness of the concept (the breadth of understanding). However with an 80-90% public awareness of reverse mortgages already achieved , there is a real case for SEQUAL and the industry to focus now on the depth of public understanding and dispel many myths that still exist.   

The recent announcement that SEQUAL have now accredited more than a thousand reverse mortgage consultants across Australia is both great news for consumers, and a significant achievement for SEQUAL.

It means that no matter where you are located you should be able to track down a local mortgage broker or financial planner who understands the product, and can properly serve your interests with current information and advice. Seniors First -  the company I manage - are proud to be part of this network, with 13 SEQUAL-accredited Reverse Mortgage Consultants nationally.

From a standing start just 18 months ago, SEQUAL have done very well to train and accredit so many industry professionals in such a short time and should be congratulated on their efforts.

Choice (Australian Consumer’s Association) recently released a report estimating the major banks are charging consumers $4 billion a year in fees.

Senior borrowers are among the worst affected, with reverse mortgages by two of the largest banks both attracting monthly fees of $12 and $15 respectively. These fees will immediately attract interest, which will eventually compound. Based on their current rate of 10.49%, a monthly reverse mortgage fee of $12 would attract approx $8,000 in compound interest over 20 years!

Some may argue that the monthly fees and higher interest rates charged by the big domestic banks are offset by the security their balance sheet (size) offers consumers. However, for those more concerned with price the good news is there are also much cheaper alternatives available in the market. Many lenders do not charge monthly fees at all, and have significantly lower rates. For assistance go here or to Seniors First.

The announcement by the Rudd government yesterday that reverse mortgages will be regulated federally through ASIC is a welcome development for consumers. How will this help in a practical sense? It will mean that ALL brokers and organisations selling and advising on these products MUST be licensed and properly qualified. Whilst many reputable groups, such as Seniors First, already meet already meet the standards that regulation is likely to require, the fact is that the current system does not demand all operators comply. Although the vast majority of mortgage brokers do the right thing, there is undeniably a small element of shonky operators. The regulation should weed these guys out, and reduce the risk of getting ripped off or poorly advised.

The down side to this announcement is that the regulation is not likely to take effect until late 2009. So what to do in the meantime? Should you hold off taking from taking a reverse mortgage until then?

 The quick answer is no.  Just be careful who you deal with. Check that your broker or adviser has the following:

• SEQUAL Accreditation
• Access to at least 3 different reverse mortgage lenders
• Membership of the MFAA

If you are unsure or would like guidance, contact Seniors First on 1300 745 745.

The Bendigo Bank seniors equity product, also known as debt-free equity release, can be a good alternative to reverse mortgages in some cases. It is not a loan, and there is no interest. Instead, you sell a share of your home in return for cash.

This product is only available in metro Sydney and Melbourne at this stage. For more info go to Equity Release Expert.  

New data just released is showing signs housing finance levels are finally responding to higher interest rates, with the number of home loans for owner-occupiers falling by 5.9% in February (WA topped the list with a 12% fall). This was the biggest fall since the housing briefly popped back in 2004. 

Most of the weakness was in lending to buy existing homes (lending to buy/build has been soft in recent months, but not to the same extent). If you exclude refinancing of existing mortgages, lending dropped 7%, which is the biggest fall since the housing market went nuts around the introduction of the GST in 2000.

Adding in the volatile investor lending category doesn’t change the story much. The total value home loans fell by 8% in February - if you exclude a fall in July this year, this was the biggest fall since the housing bubble briefly popped in 2004 before subsequently reinflating.

For the RBA, it would be happy to see housing finally responding to higher interest rates. These figures pre-date an official rate rise in March and a further increases by the banks, so further big falls in lending volumes are likely.

At this stage, the Reserve Bank would probably only read today’s figures as a sign that the long-awaited slowdown is under way, pointing to rates on hold for the foreseeable future. But if this keeps up, it’s possible official rates will start falling before the end of 2008, which will be welcome news for senior borrowers.

There’s been a lot in the media today about the prospect of house prices falling in Sydney and other parts of Australia by up to 25% over the next couple of years due to the global credit crunch and possibility of recession.

Although no one knows exactly how this will turn out, I think 25% is extreme. My guess is it’s more likely to be around 10% at worst, and history indicates it may not even be this bad. Depending on the source of data, the average annual increase in house prices over the last 25 years has been 6-8%. This includes the periods of negative growth in 1982, 1990, and 2004. Even during the very bad recession of 1990, average property prices declined about 6%. A few short years later any negative growth had disappeared as the market slowly recovered to 4-5% annual growth.

So the first message is this: while property values may decline in the short term, historical trends indicate they are very likely to recover in the medium term.

What does this mean for seniors with a reverse mortgage? Well, the good news is that the lenders have already prepared for this scenario. The lending parameters used by SEQUAL lenders are so conservative that it is extremely unlikely that a fall of even 25% would have any impact on lenders or borrowers. Example: a senior who is 75 years old can only borrow 30% of their property value, so the banks have ensured there is a lot of margin for error in the design of these loan products.

Such a conservative approach may not be sexy, but in these uncertin times it’s certainly prudent. Strong banks are good for borrowers, and the main reverse mortgage lenders in Australia are very well placed to ride out this storm.   

A recent study conducted by SEQUAL, It’s on the house, showed that although 78% of people over 60 had heard of reverse mortgages, only 40% correctly understood how they worked.

In fact, the study showed 28% of seniors held the incorrect belief that a reverse mortgage involved selling a portion of the home.  This is probably at least partly due to the sustained and significant marketing efforts of Homesafe Solutions for the Bendigo Bank Seniors Equity product.  Known as debt free equity release, this is completely different from a reverse mortgage, and does involve a part sale of the property in return for a cash payment.

Although a lot of progress has been made over the last few years, SEQUAL and the industry at large need to do a better job of educating seniors on exactly how these loans work. SEQUAL is asking the federal government to help, perhaps by way of an information campaign. While this would certainly help, it’s probably unlikely in the current climate of government cost-cutting.

So what to do? Well, for a start SEQUAL must more fully engage brokers and intermediaries as a grass roots education channel to other business sectors such as law and aged care. For instance, the understanding and cooperation coming from the legal sector is very poor in some states.

In addition, community and senior organistations  must be more fully engaged by local representatives so that the correct message is disseminated on a regular basis. Ultimately this is about protecting seniors through education, and the industry can’t rely on government to do this important job.   

For many retirees on limited funds, this becomes the big dilemma. In most states, the process of selling your home and downsizing to buy a smaller dwelling will cost $40-50,000 by the time you factor in stamp duty, agents fees and legal costs etc.

In addition, many people are forced to re-locate to a new area, away from their family, doctor, friends and community. This is often the most distressing aspect of downsizing.

However, accessing some of the value in the home via a reputable equity release provider can give you more cash and allow you to stay in the home you love. You need to do the sums, but in many cases it will be more cost effective to borrow via a reverse mortgage or similar, than to downsize. A good specialist finance broker will help you with this exercise.

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