Older Australians are increasingly turning to reverse mortgages to fund their retirement, but poor borrower understanding is placing them at risk, according to the Australian Securities and Investments Commission (ASIC).
For older Australians who own their home with few other assets, a reverse mortgage can allow them to draw on the wealth locked up in their homes, while they continue to live in their property.
An ASIC review, released on Tuesday, found that reverse mortgages are allowing older Australians to achieve their immediate financial goals – improving their lifestyles in retirement – but found they also raised “longer-term challenges”.
The review found borrowers had a poor understanding of the risks and future costs of their loan, and generally failed to consider how their loan could impact on their ability to afford their possible future needs.
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 die 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 like aged care.
“Reverse mortgage products can help many Australians achieve a better quality of life in retirement,” said ASIC deputy chair Peter Kell.
“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.”
ASIC’s report also finds that there is an opportunity for lenders to reduce the risk of elder abuse. Under the new Code of Banking Practice, recently approved by ASIC, banks will be required to take extra care with customers who may be vulnerable, including those who are experiencing elder abuse.
Read the full ASIC review.
Have you ever considered a reverse mortgage? How thoroughly have you investigated the costs and charges?