As reported in the Sunday Telegraph, a new report by Superratings.com.au has shown that the global financial crisis continues to decimate the retirement incomes of senior Australians. Thousands of self-funded retirees have been forced to take cuts of up to 30 per cent in their  superannuation pensions,  and many are beginning to turn to reverse mortgages to ‘plug the gap’.

The Superratings data shows that somebody retiring with a pension fund of $700,000 in 2007 could have expected an annual income of $45,000 for 20 years. But because of the stock market crash and weak performance in the past few years, that income has to be cut to $32,000 today otherwise it will run out years ahead of schedule. 

Many self-funded retirees are now really struggling financially, despite years of prudent saving. Thousands have turned to Centrelink to claim a part-pension to top up their incomes, but even this is often not enough. At Seniors First we’ve seen a huge increase in self-funded retirees coming to us for a reverse mortgage to help with larger expenses and to provide a back up line of credit in case their superannuation balance does not recover.

As I said in a recent interview with the Sunday Telepgraph, the SEQUAL statistics show that the proportion of retirees using reverse mortgages for debt consolidation has increased by 25 per cent in just two years. This seems to indicate that seniors are either retiring with more debt than ever before, or worst still, they’re accumulating high levels of new debt in retirement. I think both factors are at play, but I’m more worried about the latter because pensioners are racking up debilitating credit card debt like never before.  

At Seniors First we see many retirees who’ve struggled for years to pay the bills on the pension, only to turn to credit cards when they finally run out of spare cash. It is not uncommon for them to approach us for help only once they’ve already accumulated $30-40,000 of credit card debt. With rates of 18 or 19 per cent (at least), credit cards are probably the worst option for paying bills and covering the cash shortfall the aged pension leaves for many.    

If you’re an Australian senior watching with alarm as your credit card balance continues to grow each month, and you have no way to pay it off, you should seek help as soon as possible. The earlier you attack this problem, the better. Not only could you save thousands of dollars in exorbitant interest payments, your quality of life will suffer until you’re able to eliminate this source of worry. A frank discussion with children and/or family is often a good place to start.

Whilst using a reverse mortgage or equity release product to pay off credit cards and residual home loans can be a good strategy if there are no other alternatives left (such as using super or selling the home), it raises more fundamental questions about the inadequacy of the aged pension, soaring personal debt levels in general, and the paucity of consumer education on financial management.

Earlier this week the Homesafe Solutions senior’s equity release product was profiled on Channel 7’s Today Tonight program. The story was well-balanced, and tapped into the fast-growing demand for home equity release amongst Australian pensioners and self-funded retirees.

The Homesafe Solutions ’Debt-free equity release’ can be a good solution, and for some people will be a preferred option to a reverse mortgage. However, the product is only currently available in metro Sydney and Melbourne, so many seniors who need to access equity in their home do not have this option available. Aside from selling and downsizing, a reverse mortgage may still be the only viable option for many retirees.

Contact Seniors First on 1300 745  745 for more details on equity release options currently available to you.

All reputable Australian equity release lenders will insist that you obtain independent legal advice as part of the transaction. Indeed, you will not receive any funds until advice has been signed-off by your solicitor. This is of course a good thing: it protects you from potentially entering into an agreement that you don’t understand. All SEQUAL lenders abide by a strict code of conduct that demands this as a requirement for membership.

However, many people do not realise that this requirement also protects the lender. Independent legal advice is the best way they have of guarding against any possible mis-selling by dodgy mortgage brokers. It also ensures the lender’s legal position is sound in the case of any possible future dispute with the borrower or their estate.

If your reverse mortgage lender is not asking for you to obtain legal advice, you should really question their credibility. Check your lender here. 

In a welcome development for the Australian equity release industry, SEQUAL has now become the umbrella body for equity release rather than just an association of lenders. As a result of this change Homesafe Solutions has become a member of SEQUAL. Homesafe Solutions, Bendigo and Adelaide Bank, provide an alternative to reverse mortgages called Debt Free Equity Release. This is a ‘non-debt’ form of equity release that allows homeowners over sixty to sell a share of future sale proceeds of their property in return for cash, whilst still enjoying the benefits of home ownership. The change to SEQUAL and the resulting membership of Homesafe Solutions is a real win for senior consumers, as now all major recognised providers of equity release products in the Australian market belong to the one industry body.  All members of SEQUAL provide a ‘No Negative Equity Guarantee’ and abide by a strict code of conduct. Reverse Mortgage Watch strongly endorses SEQUAL and recommends that consumers only use SEQUAL members for equity release. 

According to Reverse Mortgage Daily, a U.S leading blog on reverse mortgages, the ‘penetration rate’ for reverse mortgages has just exceeded 2% for the first time.

This means that of all households in America that are eligible, more than 2 per cent have now established a reverse mortgage to help fund their retirement. By comparison in Australia, where our reverse mortgage industry has been active for much less time, the ‘penetration rate’ (or take-up rate) of reverse mortgages is still only about 1 per cent.

Given the huge shortfall in retirement savings and the growing numbers of ‘baby-boomers’, it will only be a matter of time before Australia too exceeds a 2 per cent take-up rate of reverse mortgages amongst eligible households. 

On September 20th, a number signifcant changes to the government aged pension came into effect.

The single pensioner rate will increase by $65 per fortnight. The pension for couples will also increase by $20.30 per fortnight combined.

The income test and ‘taper rate’ has also changed: the rate at which excess income affects the pension will change from 40 cents in the dollar to 50 cents in the dollar for singles. For couples, it will change from 20 cents each in the dollar to 25 cents each in the dollar.

The pension income test ‘free area’ is currently $142 a fortnight for singles and $248 for couples combined. Pensioners with private income below these amounts will not be affected by these changes.

For more government information on pensions go here.

As highlighted in the Sydney Morning Herald yesterday, more people are still paying off mortgages into their late 50s and beyond as higher house prices fuel bigger loans.

According to an analysis of Bureau of Statistics data, the SMH found that the proportion of people over 55 who own their home outright has fallen from 74 per cent in 2000, to 67 per cent in 2009. The slump in outright home ownership among over-55s reflects a wider decline across all age groups, but is slightly more pronounced.

This will have implications for the coming generations of retirees, who will either have to work longer to pay down these debts, or use reverse mortgage and equity release products to refinance the remainder of their home loans prior to full retirement. Recent SEQUAL data on reverse mortgages indicates that this already happening, with the percentage of new reverse mortgages being used to refinance existing home loans on the increase.  

Today Tonight’s story on reverse mortgages last Thursday night was an opportunity squandered. For a show that claims to serve the interests of seniors and consumers generally, their segment on reverse mortgages was profoundly unhelpful. 

This story was a golden opportunity to educate seniors on the pros and cons of reverse mortgages and how to release equity safely. Instead the program chose to scaremonger and portray reverse mortgages in an overwhelmingly negative way that will do little to help seniors currently struggling in the wake of the global financial crisis. The closing assertion by presenter Matt White that borrowing just 15 per cent of the property could erode all of the borrower’s equity in ten years, was spurious at best. It relies on assumptions, not disclosed in the program, of zero property growth and 12 per cent interest rates for the entire ten year period.

 Such a scenario has never occurred in Australia’s history. Given that the average property growth over the last 25 years has been 6 per cent, and that the Reserve Bank officially aims to keep interest rates in the range of 6 to 8 per cent, the example used on the show was impractical in the extreme, and of no real use to senior consumers. 

The real pity is that this sensationalist, poor journalism will put off some consumers who need it most.

Where was the fact that a senior borrower can draw as little as $300 per month to supplement their pension? Where was the fact that monthly fees charged by some lenders are to be avoided where ever possible as these themselves attract interest?  A good specialist adviser, such as Seniors First, can properly educate senior borrowers about these issues, and more.    It is true that senior borrowers must be careful when establishing a reverse mortgage, but there is much, much more to consider than what was shown in the Today Tonight segment. It was an opportunity squandered.

Members of the public who want to properly understand reverse mortgages can obtain a free copy of the Seniors First consumer report by download at www.seniorsfirst.com.au or by calling their office on 1300 745 745.      

Reverse Mortgage Watch has written about the new government reverse mortgage information service, ERRMIS, before . This is a free service provided through the National Information Centre on Retirement Investments (NICRI) that’s designed to help Australian seniors make more informed choices about equity release finance. In a coup for Reverse Mortgage Watch, we’re delighted to bring you an exclusive interview with the director of ERRMIS, Wendy Schilg.  

RMW: You’ve been up an running for a 4-5 months now, how has the public response been to the launch ERRMIS?Wendy Schilg: The response from the public has been really positive. The service has filled a much needed void in the market, and people have been relieved to find an impartial consumer organisation that provides independent information. To enter into a reverse mortgage is a major decision and obviously an emotional experience for many retirees. I think that our service offers support to people during the decision making process. As one caller said in a letter “Thank you so much for all your help – you have kept the nervous break-down at bay for the moment”  RMW: What are the main questions or issues that people are calling with?Wendy Schilg: Safety is the main issue people want to talk about. Questions may relate to any potential decreases in the pension as a result of the mortgage, the amount of interest that will accrue on the loan, who the providers are and what to look out for in the contract. We also have a lot of people new to reverse mortgages who want a 10 minute Reverse Mortgage 101 course.   Callers with a reverse mortgage, or about to take one out, will often have technical or specific questions – there are great calls to receive as they give us a greater insight into the various providers and product features. 

RMW: How many calls are you taking a week at the moment?Wendy Schilg: We are averaging around 150 calls per week. It was really busy for a period in late April as a result of an article in the Centrelink publication News for Seniors, but has settled down again. At one stage we were taking over 200 calls per day – quite a bit considering that there are only 2 information officers looking after the service!

RMW: From your discussions with consumers, what do you think industry (brokers, lenders and government) can do better?Wendy Schilg: We have made a submission to the Henry Review, and also provided Government Ministers with briefings on areas we think can be improved within the industry. These include: better disclosure of break fees – a recommendation SEQUAL has already acted upon; tighter regulation of reverse mortgage providers who leave the market but maintain services to existing clients; and clearer terms and conditions documents. The Government will be looking to enhance regulation and disclosure of the Reverse Mortgage industry by mid 2010, and we will continue to work with them by providing caller feedback and raising issues. 

RMW: What does the future hold for ERRMIS?

Wendy Schilg: The Federal Government originally funded ERRMIS for a 6 month pilot. The pilot is due to end within the next few weeks. Obviously we hope to maintain the service indefinitely and we are in talks with the Government for ongoing funding. Demand and feedback has indicated that ERRMIS is well needed, and I think the Government recognizes that ongoing independent support for retirees entering into reverse mortgages is essential.

 Thanks to Wendy Schilg and ERRMIS for their contribution to Reverse Mortgage Watch. Call ERRMIS on 1800 615 676. Readers can also download their free guide here and Reverse Mortgage Watch’s free consumer reports here.   For help comparing the lenders, call Seniors First on 1300 745 745 (Disclosure: the editor of this site is Managing Director of Seniors First)