Reverse mortgages - the case for and against
New research has identified some potential traps and obstacles for the increasing numbers of older people who are seeking to take out reverse mortgages to fund their retirement or aged care.
The research also underscores the potential value of these products for improving quality of life in retirement when unanticipated adverse circumstances crop up.
A study led by Australian Housing and Urban Research Institute (AHURI) researcher Associate Professor Catherine Bridge found that the risks faced by reverse mortgagees included: people living longer than they expect and falling into debt; compounded long term interest; falling property prices resulting in negative equity; and, any future negative tax rulings on means testing for the aged pension and for care home assessment.
The study also found a lack of expertise among legal and financial service providers and the need to consider regulation to protect older and vulnerable consumers from bad deals.
It said the advantages of reverse mortgages included: the ability to release equity while staying in the family home; topping up income to enhance standards of living; and, accessing funds for home maintenance or to adapt the home to the needs of ageing occupants.
A reverse mortgage is a loan available to older homeowners that allows cash to be borrowed against the value of the property. The demand for reverse mortgage products is expected to rise significantly over the next 25 years, the study said.
'As people are living longer, homeowners may be willing to trade off housing equity for a level of financial security in retirement. In 2008, there were 36 000 reverse mortgages in Australia. Both the number of loans and the size of these loans have increased,' it said.
'This potential for expansion, however, is hindered by a number of risks and obstacles that impact on the sustainable growth of the reverse mortgage industry,' the study, compiled by experts from the Univeristy of NSW, the University of Western Sydney and Sydney University, said.
'Risk, complexity and attendant commissions have resulted in resistance to the product by a number of lenders and brokers and borrowers reported difficulty in accessing information about the nature and range of reverse mortgages.'
Professor Bridge, of the University of NSW, and her co-authors found reverse mortgages could provide a viable option for older and often, more vulnerable Australians, to age in place. But the biggest issue currently facing consumers was the lack of balanced of information on reverse mortgage products.
They said improving support and information for older people seeking advice about care and funding options was critical to redressing this.
The research also highlighted that further industry education for financial and legal service providers on reverse mortgages was necessary.
'Financial and legal service providers in this area need to better understand the availability of reverse mortgage products, their features and appropriate usage, and where to find further sources of information,' the study said.
It said regulation could reduce risks for older consumers by ensuring the suitability of the match between the available product choices and consumer need, with the most vulnerable in mind.
The self-regulation implemented by the industry had improved outcomes for the sector but the small size of the industry’s peak body in a potentially growing market, and the future adequacy of voluntary self-regulation needs to be explicitly examined, the study said
The sustainable growth of the market could require government to consider ensuring that tax and pension provisions continue to exclude equity based products from assessments of benefit entitlement and that they are similarly excluded from income assessment requirements for community care services, it said.
Full report: http://www.ahuri.edu.au/publications/p70512/
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