Housing equity withdrawal: uses and risks of alternative options for older Australians

Summary

This project considered the financial costs and risks of alternative housing equity withdrawal mechanisms. It provides recommendations about mitigating risks associated with mortgage equity withdrawal products for older Australians.

Project Number: 81004
Research Theme(s): Home ownership, Economics and modelling, Health, ageing and disability
Project Leader: Ong, Rachel
Funding Year: 2012
Research Centre: AHURI—Curtin University

Description

The incidence of housing equity withdrawal has increased over the last decade, despite a global financial crisis and its aftermath. In situ equity borrowing (where the household remains in the property but withdraws equity through a mortgage product) is the main way this occurs but there is a shift toward more traditional methods—downsizing or selling up—among those above pension age.

The typical in situ equity borrower has a relatively strong financial and employment background and negligible negative equity risk. However, older home owners who sell up typically have very little income or assets to rely on and are more likely to have suffered ill health, separation, divorce and bereavement. Furthermore, transaction costs and the operation of means tests eat into the housing equity realised, and moves away from the neighbourhood can result in social isolation.

Housing equity withdrawal is often associated with adverse life events. Such events increase time pressures, limit opportunities for considered planning, and elevate the risks of making unsound financial judgments or accepting inadequate or inappropriate advice.

Mortgage equity products, particularly reverse mortgages, are viewed as inherently risky by older home owners even though they may provide benefits. Initiatives that offer protection against the risks would also go some way towards removing the stigma attached to reverse mortgages. Various strategies to mitigate risks of mortgage equity products include:

  • Regulating supply , by capping maximum loan advances, ‘red-lining’ particular geographic locations, and giving ‘no negative equity’ guarantees.
  • Promoting consumer understanding including full awareness of the protection afforded under consumer protection laws, and the consequences of various products for income support entitlement levels and transaction costs.

Where householders still choose to downsize into rental properties, policy-makers can assist ‘ageing in place’ by offering ageing tenants some of the benefits of home ownership (e.g. tenure security) to meet the need for ontological security in old age.

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