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.

From July 1st, ASIC formally took over the regulation of the Australian credit market with the Federal Government’s new legislation, the National Consumer Credit Protection (NCCP) bill, coming into effect for the first time.

This is a win for consumers generally, and seniors in particular. The centrepiece of the bill, ‘Responsible Lending’, now makes it an offence for a lender, bank or broker to recommend a loan or credit product that is unsuitable for the borrower.  There is now a much higher onus on lenders and brokers to ‘know their client’ and ensure that any product selected is ‘not unsuitable’.

OUTCOME: This will better protect vulnerable consumers from unscrupulous lenders and brokers. In particular, those rogue operators who have in the past recommended ‘Low Doc’ or ‘No Doc’ loans for pensioners and the elderly – often with devastating effects – will now find it much harder. Consequently , it is highly likely that regulation will drive many such ‘fringe dwellers’ from the industry, thereby improving both the professional standards of the mortgage broking community, and the experiences that consumers have when seeking credit through such intermediaries. 

Reverse mortgages will be subject to further specialist treatment under ‘Phase Two’ of regulation, from Jan 2011.

TIP: When dealing with a mortgage broker in future, you should check that they are registered with ASIC first.    

Although a number of prominent lenders have left the market over the last eighteen months due to the global financial crisis, a new study has found that the reverse mortgage market continues to grow with total loans now exceeding $2.7 billion.

The SEQUAL report found that reverse mortgages increased by 4 per cent in the 6 months to December, and 9 per cent in the 2009 year. There were more than 2,665 new reverse mortgages originated in the second half of 2009. In addition, the average loan size has increased from $51,000 in 2005 to $70,000.

SEQUAL CEO, Kevin Conlon, said that the perception of reverse mortgages amongst retirees has been steadily improving amongst retirees over recent years, and that the trend towards home equity release was inevitable due to the rapidly ageing population.

"Attitudes towards retirement funding are changing. The home is increasingly being considered a part fo the planning process with equity release being seen as a means to unlock the substantial wealth stored in property."

The report also found that ‘home improvement’ was now the most popular purpose amongst reverse mortgage borrowers.   

In a positive move, the state government has just announced in its budget that NSW home owners over 65 will soon get an exemption on stamp duty when downsizing to buy a new home for less than $600,000. This represents a potential saving of about $25,000, and will make selling and buying another home of lesser value more attractive for many.

Although some commentators have already made the point that the dollar limit of $600,000 should be higher (given the median house price in NSW is $600,000 too), it is nevertheless a long overdue step in the right direction.  

For retirees who need to access some value in their property but do not wish to sell their family home, reverse mortgages and equity release products will remain an attractive option.

The most popular reverse mortgage lender in Australia over the last few years, Royal Bank of Scotland, recently announced it has suspended all new lending pending a trade sale of the reverse mortgage business. Existing commitments will continue to be honoured and current RBS reverse mortgage borrowers will not be affected. 

Following a strategic review of its businesses, the partially state-owned Royal Bank of Scotland decided to exit all non-core retail businesses outside of the United Kingdom. As a result, it is closing its Reverse Mortgages Services Pty Limited.

It is hoped however that the RBS product range will re-emerge in several months under different ownership. Give that there are now only three or four significant reverse mortgage lenders remaining, the permanent exit of the former RBS product would be a major blow to senior borrowers and the aged care industry, for whom RBS was the major funder of accommodation bond finance.

Until its closure to new reverse mortgage applications, RBS was attracting around 40 per cent market share for all new reverse mortgages in Australia. 

For many Australian 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 reverse mortgage or 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.

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. 

Unless you need a lump sum of cash for a specific reason (eg; paying out credit cards or to fund home improvements), then a reverse mortgage line of credit will often be the best way for senior Australians to access the money from their reverse mortgage.

How does it work?

A reverse mortgage line of credit is a pre-approved limit of equity that you can draw down gradually over the years as you need money. You only incur interest on the money you use, and the rest of the available money is (usually) still there for future possible use. The interest saving you generate by drawing the money gradually through a ‘line of credit’ can be very substantial.

Eg; Drawing $100,000 gradually over 10 years will cost 30% less than in interest than if you took the same amount as a lump sum.

WARNING: Some Australian reverse mortgages purport to offer a ’line of credit’ facility, but actually charge the interest on the money already drawn from the line of credit account. That is, if you have a line of credit for $50,000 and you have used $20,000, you might think you have $30,000 left but some banks actually deduct the interest on $20,000 from the line of credit account so that over time the $30,000 available is significantly eroded. Make sure you ask your bank or broker  if your reverse mortgage line of credit is ‘quarantined’ from the compounding interest charge.

For help with this, email me at info@reversemortgagewatch.com.au to check your loan.

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 the SMH, superannuation savings are woefully inadequate and will leave Australians nearly $700 billion short of what is needed to live decently in retirement, according to new research.

The Investment and Financial Services Association has calculated that by the middle of 2008 Australians had a retirement ‘’savings gap” of $695 billion, a dramatic increase on the $452 billion gap when the group last assessed super contributions.

The latest numbers do not include the worst of the global financial crisis, so the gap is likely to have grown. More recent data was not available. The figures mean the average savings gap is $73,000 a person, an increase of $26,000 over the previous four years.

Reverse mortgages and equity release products are a natural part of the solution to this, but the sharp reduction in lenders and product choice arising from the global financial crisis will impair the ability of some pensioners and retirees to find a solution.