The recently released 2007 SEQUAL Report contains some interesting data on exactly how people are using their reverse mortgages:

1. 90% of new loans were taken as lump sums, and only 10% as an income stream.

This figure is somewhat misleading as the ‘lump sum’ data also includes all loans taken wholly or partly as a ‘cash reserve’ or ‘line of credit’. 

2. The proportion of younger borrowers is rising

Although the average age for people taking out new loans is 72, the 40% of new borrowers were under 70 years of age (compared with 29% for existing loans). This indicates that reverse mortgages are growing in popularity the fastest amongst those aged 55-70.

3. Variable interest is the most popular choice    

Although fixed rates have risen in popularity to 34% of all new loans in 2007, the vast majority of reverse mortgages were established with a variable rate in place (66%).

4. Mortgage brokers are now the most common way for seniors to establish their reverse mortgage

45% of all new loans were established via mortgage broker in 2007, compared to only 34% directly with a financial institution. This seems to confirm that seniors are actively seeking the wider product choice that brokers can provide in an effort to get a better deal and save on interest.

5.  Home improvements and general living the most common purposes

 The most common use of funds provided by reverse mortgages in 2007 were:

• Home improvements - 16%
• Regular income -  12%
• Debt consolidation - 11%
• Travel - 8%
• New Car - 5%

The figure for ‘other’ was listed at 41%, but anecdotally this can be mostly attributed to general consumption and living expenses.   

According to the annual industry report released last week, the demand for reverse mortgages in Australia continues to grow strongly. The industry body, SEQUAL,  has just released the market figures for the 2007 year which show that outstanding reverse mortgage loans now exceed $2 billon. 

A summary of the key points found in the report:

• 33,700 loans now outstanding amongst senior conumers
• Market growth for existing loans was 34% in the past 12 months
• The average loan size is now $60,000

The report also found that whilst the outlook remains strong, growth for new loans slowed in the second half of 2007. This was due to a combination of factors including the global credit crunch and political uncertainty surrounding the recent federal election. 

As of April 1st, all mortgage brokers who offer reverse mortgages to senior borrowers must be accredited with the industry body, SEQUAL or they will face expulsion from the industry. 

In a positive development for consumers and the industry, the Mortgage and Finance Association of Australia (MFAA) has ruled that mortgage brokers who have not completed the SEQUAL training and accreditation course can no longer provide a reverse mortgage to a borrower until they have done so.

Although the vast bulk of mortgage brokers are professional and do a good job, there are still some ‘cowboys’ who just chase a fast buck with scant regard to the actual needs of customers. This new ruling will make it much more difficult for these dodgy brokers to operate in the senior’s market.

If you’re seeking a reverse mortgage or equity release plan, and you’re using a broker to assist with the transaction, you should ask your broker the following questions upfront:

• Are they accredited with SEQUAL? If so, ask for evidence.
• How many lenders do they have access to? They should have at least four.
• What are their charges?

A good broker will generally not charge you directly, as they receive a commission from the lender. For a better idea of what a reverse mortgage broker should offer, check out the Voluntary Code of Conduct recommended by Seniors First here.

In response to the recent credit drought in world debt capital markets, Macquarie Bank has announced it’s withdrawl from all mortgage origination, including reverse mortgages.

Although some new business will continue to be written, it will be at vastly reduced volumes. You can read more about it here

What does this mean for seniors and the reverse mortgage industry?

One less funder means reduced choice for consumers, which is a not ideal. However, there are still many lenders operating in the market who are providing excellent product offerings to senior borrowers. My guess is that there will be a further ‘flight to quality’ amongst consumers. They will naturally seek out the more established lenders, and use specialist reverse mortgage brokers to help them make the right choice.

There has been a lot in the news recently about “mortgage stress” affecting families and younger borrowers. However, it now seems to be increasingly affecting older borrowers also. At Seniors First we’ve noticed a recent surge in enquiries from seniors who are looking to refinance their residual home loan and/or credit card debt into a reverse mortgage so that monthly repayments are no longer required.

This can be a good solution for improving monthly cash flow, however in some cases it will not be possible. If the proportion of your existing debt too high, the reverse mortgage lenders’ rules will not allow sufficient funds to refinance (the amount you are eligible for is determined by your age and the value of the property).

This news was picked up by the Sunday Telegraph in Sydney and published on March 9th, 2008. The article is a good one, and you can read it here