It seems older Australians are finally coming around to reverse mortgages.
Recent government figures show demand for the federal government’s Home Equity Access Scheme (HEAS) – has skyrocketed.
As of March, 12,115 participants have signed up for the scheme, compared to just 768 in 2019.
And it’s not just the government scheme, the Sydney Morning Herald (SMH) reported Heartland Bank saw an 18 per cent increase in new reverse mortgages in 2022-23.
Reverse mortgages are essentially an avenue for homeowners to tap into the value of their home.
Also known as home equity release, the loan does not become due until the home is sold, the owner goes into aged care or passes away.
They were on the nose a bit for a while there as poor products were found to be hurting consumers.
But supply and demand for the products went both ways as Australia’s big four banks pulled out of the market due to increasing regulation and rising costs.
While they can be a good way for seniors to access income, they don’t come without risks.
A review in 2018 by the Australian Securities and Investment Commission (ASIC) found consumers had a poor understanding of the risks and generally failed to consider how their loan could impact their ability to afford their possible future needs.
ASIC Deputy Chair Peter Kell said: “Reverse mortgage products can help many Australians achieve a better quality of life in retirement.”
“But our review shows that lenders and brokers need to make inquiries that would lead to a genuine conversation with customers about their possible future needs, not just a set of tick boxes on a form.”
Naturally, the loans come with interest that compounds over time.
The current HEAS interest rate is 3.95 per cent per annum. This rate compounds each fortnight on the loan balance until you repay the loan in full. The longer you take to repay the loan, the more interest will accumulate.
Commercial products charge about 10 per cent interest rate.
According to MoneySmart the cost of the loan depends on:
- how much you borrow
- how you take the amount you borrow (for example, a lump sum will cost more due to compounding interest)
- the interest rate and fees (for example, loan establishment, ongoing fees, valuation)
- how long you have the loan
Over time, your debt will grow and your equity will decrease.
ASIC says under legal protections in place since 2012, borrowers can never owe the bank more than the value of their property, and can remain in their home until they pass away or decide to move out.
However, depending on when a borrower obtains their loan, how much they borrow, and economic conditions (property prices and interest rates), they may not have enough equity remaining in the home for longer-term needs such as aged care.
Minister for Social Services Amanda Rishworth told the SMH the HEAS growth was expected.
“It provides a flexible and secure way for them to supplement their retirement income,” she said.
“Pension arrangements aim to strike a balance between assisting those who need it most, while also ensuring sustainability into the future in the context of an ageing population.”
Would you ever consider a reverse mortgage? Why not share your opinion in the comments section below?
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Have recently heard that some Financial Advisers are recommending clients take out a HEAS loan to invest in the stock market.
Huge red flag there but guess some in the industry see opportunities everywhere.
Can only hope the regulators are not asleep at the wheel or are different bureaucrats than those overseeing the NDIS.
Bakka – you are well informed. ASIC decided they had no place in the HEAS regulation as it is statutory lending. They seem to have forgotten that Home Start is a South Government statutory authority, but also has a reverse mortgage product sold under their Credit Licence and regulated as such by ASIC.
ASIC – head in the sand and not wanting to protect older Australians – similar in the situation of the other Equity Release offering from Homesafe Solutions. A recent publication from The Guardian illustrates how seniors have lost many times more than a reverse mortgage may have cost.
Seventeen years ago, the UK declared a Home Reversion Scheme (similar to Homesafe) as a Home Finance Transaction and included it in the Mortgage Act – no such protection from our regulator (ASIC)