University to probe reverse mortgages

University of NSW Business School to investigate low uptake of reverse mortgages.

Uni to probe reverse mortgages

Researchers from the University of NSW Business School will investigate behavioural and other issues behind the low uptake of reverse mortgages in Australia.

A reverse mortgage is a loan that enables homeowners to access their home equity; the homeowner can borrow without having to make repayments while living in the home.

Home equity is typically the largest component of total household wealth, so a reverse mortgage can complement superannuation and the age pension as a financial resource in retirement.

Senior research fellow Dr Katja Hanewald and Professor Hazel Bateman will investigate theoretical and empirical aspects of reverse mortgage demand and product design.

“While economic theory predicts that households would demand reverse mortgages to improve retirement funding, the take-up rates for reverse mortgages are low in Australia and internationally,” said Dr Hanewald.

Last year, a review by the Australian Securities and Investments Commission (ASIC) found that reverse mortgages allowed older Australians to achieve their immediate financial goals and improved their lifestyles in retirement, but did find some “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 such as aged care.

The UNSW Business School is funding the two-year research project with industry partner Household Capital, which offers services to enable older Australians to combine their superannuation, pension and home equity to provide retirement funding.

The research team will investigate the impact of behavioural factors as an explanation for subdued reverse mortgage demand.

“Combining our research track record and Household Capital’s industry expertise, we will design, and field test, an online experimental survey to study the role of mental accounting in the demand for reverse mortgages,” Dr Hanewald said.

“By investigating behavioural explanations to the ‘reverse mortgage puzzle’, this research will address demand and supply side barriers to further development of a reverse mortgage market in Australia and internationally.”

As well as the option of reverse mortgages, Centrelink also offers a Pensions Loan Scheme (PLS), which provides a similar service. The PLS will undergo changes from 1 July, making the scheme available to anyone of pension age, whether they receive the Age Pension or not. The amount that can be borrowed will also increase.

The PLS is similar to a reverse mortgage, but borrowings can only be taken as fortnightly income payments and not as a lump sum.

Previously, full-rate age pensioners could not borrow under the scheme, but they will now be able to borrow up to 50 per cent of their annual pension. Higher amounts will apply for part-pensioners and self-funded retirees.

The PLS interest rate is currently 5.25 per cent per year, which is higher than home mortgage rates but lower than typical reverse mortgage schemes.

Have you ever considered a reverse mortgage? How thoroughly have you investigated the costs and charges?

Are you eligible for an Age Pension? Do you know your rights? The PensionChecker™ tool has all the information you need.

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    COMMENTS

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    Rae
    12th Jun 2019
    10:33am
    More than 5.25% interest. Joking?
    Cowboy Jim
    12th Jun 2019
    10:39am
    Agree Rae. One would have to be desperate indeed.
    tams
    12th Jun 2019
    1:25pm
    Cowboy Jim

    Desperate ? - on $926.20 per fortnight
    tams
    12th Jun 2019
    1:25pm
    Cowboy Jim

    Desperate ? - on $926.20 per fortnight
    TREBOR
    12th Jun 2019
    11:53pm
    Is that all you get, tams?
    Cowboy Jim
    13th Jun 2019
    9:38am
    Well tams, had our place valued, result $310'000. Me thinks we might be better off selling it and rent and get rent assistance as well. As a non home owner you can have more assets so most of the house value in the bank would do no harm to the pension. better than a reverse mortgage at more than 5%.
    TREBOR
    12th Jun 2019
    11:06am
    To the question raised:- EVERYTHING!

    Next question........??
    TREBOR
    12th Jun 2019
    11:14am
    Well - I did figures when it was around 7%+ interest rate, and it works out that you double the debt in seven years, then triple it in another four, then quadruple it in another two - so by the time you'd had it for thirteen years, you owed four times what you borrowed - so if you borrowed 25% (for the sake of argument) all you had left was any possible capital increase in your property.

    At 5.25% - still a remarkably high figure given that the 'risk' is virtually zero (unless the property market falls out of its own sphincter and hits the ground in a big smelly heap) - a rough estimate would be 8-9 years to double, then up to 12-13 to treble, and so forth.

    Don't have the dedication to do figures for you at the moment...

    In reality it is another way of enforcing pensioners/retirees to spend down their capital developed in life, and to - at the end of the day - push the creation of a massively divided along 'wealth' lines society, leading to a reversion to the finally beaten to death 'masters and servants' and a massively 'classed society, in which the majority will eat cake.

    Wouldn't touch it with a barge pole... (Valdemar Koslovsky son of Vladymir - runs a river barge from Warsaw to Gdansk (formerly Danzig).......
    TREBOR
    12th Jun 2019
    11:21am
    Vlad, who plied the waters of the canals for sixty years before he retired, was the famous Vulgar Boatman due to his extraordinary collection of epithets for the horses used along the tow-paths to get them to work harder. Mind you, the horses just plodded along as usual.....
    Old Man
    12th Jun 2019
    11:28am
    I don't agree with your figures, Bob, and I'll explain why. As the interest is compounded it comes under the "Rule of 72" which is used to work out how many years it takes to double the debt. You need to divide 72 by the interest rate and this will give you the number of years that it will take to double the debt. In your example, at an interest rate of 7%, it would take just over 10 years to double the debt.
    TREBOR
    12th Jun 2019
    11:40am
    I did the figures - I might have forgotten them - but the point is it rapidly accelerates....

    I don't think I kept my workings on this... anyway the Valdemar Rule still applies...
    Theo1943
    12th Jun 2019
    12:23pm
    Having not much to do today and it's raining I played with the figures a bit
    If you take $50,000 and the lender charges you 7% calculated monthly your debt will double in 10 years, triple in 15.5, quadruple in 20. Remember the rule of 72?
    At 5.25% it will double in 13.4 years, triple in 21, quadruple after you're dead.
    A better way is to withdraw $500 a month. At 5.25% after 13.4 years your will have withdrawn $80,000 and your debt will be $115,000.
    At $400 a month after 13.4 years you will have withdrawn $64,000 with a debt of $92,000
    TREBOR
    12th Jun 2019
    1:43pm
    I think I see the error - your figure derives from repayments along the way - not to a non-repayment along the way reverse mortgage... without repayments along the way the amount would double in a shorter time...

    (I was wrong once - not sure when though)....
    Theo1943
    12th Jun 2019
    2:01pm
    Sorry Trebor, you are wrong this time. :-)
    No repayments in my calculations.
    TREBOR
    12th Jun 2019
    5:01pm
    Ah, well - I did the figures once - just working from memory...
    Arvo
    12th Jun 2019
    6:43pm
    TREBOR- Poland is today the most capitalist country in Europe and has become one of the most capitalist economies in the world. ... And during a period of growing angst and uncertainty here at home, Poland represents an interesting place to put some investment capital

    As for Valdemar Koslovsky son of Vladymir, he whacked on an outboard motor on his barge so he wouldn't need to use the pole....Capitalism sure makes a lot of people lazy....
    TREBOR
    12th Jun 2019
    11:55pm
    Damn - modern technology has ruined the towed barge trade.... let alone the vernacular of the Vulgar Boatmen ..... his grandfather Voldomir would be aghast....
    Arvo
    13th Jun 2019
    1:04am
    By the way TREBOR the name Vladamir, Voldomir, Koslovsky is very much Russian or Belarus , not Polish...although there might be a Pole with the name Koslowski....It's like Vodka is Russian but Wudka is Polish.....That's my contribution for the day to widen some people's orientation about who's who and what's what in this world...
    Paddington
    12th Jun 2019
    11:20am
    Just no! People who have done it regret it.
    If so desperate, then sell and move to somewhere cheaper. Not downsize as such but do it to get rid of debt or release some cash. This is a better option if there is no way to stay in your present home.
    This could happen if one dies and it is too much for the remaining partner to maintain or afford.
    TREBOR
    12th Jun 2019
    11:22am
    Yup - happened to the parents of a lady we know here.... her dad took one, carked it, and mum was left with virtually nothing, and no inheritance.
    Old Man
    12th Jun 2019
    11:21am
    We have not considered a reverse mortgage and therefore have not investigated the costs and charges. At this stage in our life I can't ever see that we would take up an offer on a reverse mortgage but because our crystal ball has proved unreliable I won't rule out the possibility. One of our concerns with a reverse mortgage is that the interest is compounded, it's not reducible or even simple interest but interest on interest which could make such a mortgage an expensive exercise.
    TREBOR
    12th Jun 2019
    11:39am
    Always worries me when they claim they 'need a university' to look into it - anyone with half a brain (politician, military officer, public servant, etc) could do it for them without a Ph.D... and wouldn't even charge much, either.....

    The Learned Professor, without whom no decision can be made or consideration given re an issue, is superfluous.. but they need to do something, I suppose....
    Old Man
    12th Jun 2019
    11:58am
    Yes Bob, the way universities are heading this exercise will only be carried out by a professor who is acceptable to the students, has no ancestors who ever did anything that the students find as sexist, racist, homophobic or did anything that may have changed the climate. Said professor will also need to tick as many boxes as possible to fulfil the rules set by the student body. I am sure that said professor will have an ethnicity other than Caucasian, will be a lesbian and, hopefully, have a limp. The said professor's qualifications will be irrelevant and their professorship may not necessarily be connected with economics but can be of the Humanities.
    Chris B T
    12th Jun 2019
    12:37pm
    They have to make Use of their University Degree (HECs Debt)
    Being useful while waiting for something more fitting to come along.
    The only Beneficiary is the Government.
    tams
    12th Jun 2019
    1:24pm
    Old Man's comment is interesting about compounding interest.

    What we should also look at is the compounding growth of property over the past 20 years. We will always have ups and downs, but the average growth across median prices is 7% per annum.

    Let's say it's 3%.
    If as Theo 1943 illustrated ($400 per month for 13.4 years) the loan to be repaid then would be $89,223.

    During that time the 3% growth on a $500,000 would appreciate to $734,000, with the loan outstanding of $89,223, leaving a net equity position of $645,000.


    In summary after 13.4 years, the borrower has used up $62,000 of equity and his/her net position is $645,000. It has cost $27,000 for an improved lifestyle with a greater net equity position as compared to when the funding commenced.


    Everyone is different but we continue to get these negative comments from those who just "bag" everything. If you use up $62,000 for your lifestyle and still leave your beneficiaries %645,000, and that's meeting your goals, go for it. Otherwise get the kids to give you $400 per month for 13 years - good luck
    tams
    12th Jun 2019
    1:24pm
    Old Man's comment is interesting about compounding interest.

    What we should also look at is the compounding growth of property over the past 20 years. We will always have ups and downs, but the average growth across median prices is 7% per annum.

    Let's say it's 3%.
    If as Theo 1943 illustrated ($400 per month for 13.4 years) the loan to be repaid then would be $89,223.

    During that time the 3% growth on a $500,000 would appreciate to $734,000, with the loan outstanding of $89,223, leaving a net equity position of $645,000.


    In summary after 13.4 years, the borrower has used up $62,000 of equity and his/her net position is $645,000. It has cost $27,000 for an improved lifestyle with a greater net equity position as compared to when the funding commenced.


    Everyone is different but we continue to get these negative comments from those who just "bag" everything. If you use up $62,000 for your lifestyle and still leave your beneficiaries %645,000, and that's meeting your goals, go for it. Otherwise get the kids to give you $400 per month for 13 years - good luck
    TREBOR
    12th Jun 2019
    1:45pm
    Play the game, tams and not the men and you'll get along just fine... I like to run an orderly unit....
    Triss
    12th Jun 2019
    11:23am
    Easy to figure out. If the government has created a scheme for pensioners it’s going to be shonky. Run the other way.
    TREBOR
    12th Jun 2019
    11:42am
    How do you know a politician is trying to rort you? He/she opens his/her mouth.... the lips move....
    Buggsie
    12th Jun 2019
    11:33am
    My late mother took out a reverse mortgage on her home when she finally "retired" at age 82. Unfortunately she did not advise any of her family and was suffering from dementia at the time. Her so called 'independent financial adviser' was recommended by the finance company which issued the reverse mortgage. When my brother and I had to hospitalise our mother and attempt to sort out her affairs, we were met with obstructions from the finance company, including the imposition of very substantial early opt out fees if we paid out the amount owing. We took legal advice and eventually settled, but were told that no legal case would br likely to succeed if brought against either the financial adviser or the finance company. My advice - beware, don't do it, there are other options that are much better. Current legislation is still very inadequate and unlikely to improve much under the current LNP government.
    Eddy
    12th Jun 2019
    11:51am
    Reverse mortgages, funeral insurance, pet insurance seem to be the latest innovations the financial system is employing to part us from our money/assets. To paraphrase Trebor I wouldn't touch any of them with a barge pole. If I needed to I would take Paddington's advice and sell-up and move to cheaper accommodation.
    Dave R
    12th Jun 2019
    1:25pm
    Agree totally and add to that most other insurances. All are a rip off you are highly unlikely to ever need. As my home and contents insurance premiums kept rising I cancelled them because they were no longer fair value for money. Same with comprehensive insurance on my car...gone...just have the cheap third party accident cover now. I have paid umpteen thousands in premiums all up over the years and at 69 years old have never made a claim for anything. And you know why....because very few people ever need to and that's why insurance companies are so profitable.
    patti
    12th Jun 2019
    11:53am
    I took out a Reverse Mortgage two and a half years ago, as my home was in urgent need of repairs (new roof etc) and I wanted to discharge my small remaining house loan so I could actually afford to live on the Age Pension, my only income. My only other option was to sell my house, and rent, then would have lost part of pension. I also did some car repairs, and visited my family interstate. And I still haven't used up all the money I could have borrowed. I do wonder about future costs sometimes, but I need money to live now, not to worry about the future. I have been very responsible all my life, and it wasn't getting me very far. I'm 75, so have a few more years left in me.
    KSS
    12th Jun 2019
    12:34pm
    Frankly all the comments about the costs involved are mostly irrelevant. "...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." The only people who may be affected are tjhose that expected to inherit the property and find that they either inherit nothing or far less than they expected.

    This is the real reason people won't take a reverse mortgage and will live in relative poverty because they want to leave it to the kids. It has little to do with not understanding how the system works, and everything to do with leaving an inheritance.
    TREBOR
    12th Jun 2019
    5:09pm
    Society divided between the mega-haves and the have-nots? Ring a bell? Only the haves possess any right to pass on an inheritance......

    That's been addressed here in many ways over many strands...
    KSS
    12th Jun 2019
    7:08pm
    If they are " have nots" there is nothing to pass on is there. You are not making sense.
    TREBOR
    12th Jun 2019
    11:57pm
    Ah - but left alone they would not be total have-nots, eh? I always make sense....
    Arvo
    12th Jun 2019
    12:46pm
    "Previously, full-rate age pensioners could not borrow under the scheme, but they will now be able to borrow up to 50 per cent of their annual pension."

    But, only if their house or unit is valued at more than $200,000. There are many pensioners in regional areas whose home units have a value of less than $200,000.
    What about them?
    Arvo
    12th Jun 2019
    12:56pm
    Not that I recommend reverse mortgage, it's the last resort if one is very desperate, to give most of their real estate asset away. But, I don't like the discrimination against rural, country and regional home or home unit pensioner owners whose residential property is worth less than $200,000.
    Chris B T
    13th Jun 2019
    8:44am
    The sad Part is that any Home Owner Value Is Below $370,000 are Discriminated against already.
    Non home owners are allowed more Asset Value plus Rental Assistance which gives the Arbitrary Value of $370,000.
    No need to be in Remote or Regional Areas.
    There would Have To Be a Major Event for anyone to choose Reverse Mortgage.
    Not a Bludger
    12th Jun 2019
    12:57pm
    Well there you go - turns out that Household Capital is a financial advisor outfit with close links to ME bank which in turn is controlled by union controlled industry super funds.
    This just looks like unions and industry funds seeking another way to get into retirees wallets.
    And, does not need an expensive, third party university study to answer the question.
    The answers are:-
    - those who have spent half or more of their working lives grafting to pay off an expensive mortgage have no desire to mortgage their most important asset again
    - the interest rates are usuriously high and to the benefit only of the lender plus, of course, the fees to the financial advisor - payable up front, no doubt
    If such a study was really needed, why not use the huge data base held by the big banks of current and past mortgage customers or put the Department of Treasury on the job?
    sunnyOz
    12th Jun 2019
    1:11pm
    The PLS interest rate is ridiculously high, and unfair. Same as deeming rate. Treasurer complained about Bank's being unfair in not passing on full interest cut. Well the govt sits in the same bag, unfair in overcharging interest.
    Ed
    12th Jun 2019
    1:31pm
    For me it's very simple, I Don't Trust BANKS...!
    MICK
    12th Jun 2019
    5:12pm
    Is this 'article' for real?
    Reverse mortgages are the next nail in the coffin for ordinary Australians which bleed them of everything they own and leave them paupers when they die, and their children get NOTHING.
    This is not what we were once and we all need to see that these products are marketed to selfish and greedy Australians who are unable to see that this is the next wave of destitution for the following generation. Anybody who takes one is to be pitied. I hope a future government makes them illegal as they are as toxic as poker machines and gambling.
    Oldman Roo
    12th Jun 2019
    8:12pm
    Mick , Congratulations to your o so true comments .
    I like to add my own addition on the subject and categorically would never live in a house that , after a life time of hard work to own , will no longer be mine . I would not enjoy living in it anymore and feel insecure , especially if we had a big drop in house prices . Yes , I am the conservative advanced age Pensioner and the Government should start to treat us with respect . Every Pensioner deserves the right and fairness to a the choice of investment to what they feel comfortable with and not be pressured by a Government into worry and fear that could lead to illness or worse .
    I also have no envy if the more adventurous have a much higher return than I have and can handle the risk factor or occasional wipe out . We are not all the same and it can be compared with the old saying " horses for courses " .
    So let this Government also stop robbing the Cash Investor with deeming rates that are not out there to get and appear like a fraud due to Government maladministration of the economy .
    in2sunset
    12th Jun 2019
    8:47pm
    Mick - the reverse mortgage is not only target at selfish and greedy Australians - but many elderly pensioners who can least afford it. They do not have the luxury of much (if any) superannuation, and the only thing they have is they own their own home. They need work done around the house, or just some extra to live on - so see these RM as a godsend. Little do they realise the mess they are getting into. I saw this recently with some neighbors - struggling to do much needed repairs on their home, so took out a RM. Didn't tell kids. 3 years later - the proverbial hit the fan, and they had to sell the house and move to something smaller. Not totally happy there, but they at least got out before it got worse. They were in their early 70's when they first took it out, and very naive about finances, etc. They now realise their mistake and are very vocal in warning other elderly friends to avoid them. I saw the stress this caused them (guy ended up having a heart attack).
    As usual - if it sounds too good - avoid it.
    TREBOR
    12th Jun 2019
    11:57pm
    Doomsday Lending....... paid after you're doomed....
    GeorgeM
    12th Jun 2019
    11:53pm
    "Researchers from the University of NSW Business School will investigate behavioural and other issues behind the low uptake of reverse mortgages in Australia." Why? The answer is obvious and does NOT need any research. Reverse mortgages are the best method to destroy wealth, being the cumulative interest earner in reverse, i.e. reducing wealth by the fastest method! Maybe these so-called "researchers" can read YLC comments here, get enlightened, and use that research money elsewhere.

    Also, YLC seems to promote the Govt's pathetic Pension Loans Scheme (PLS) frequently - pathetic because the interest rate of 5.25% is well above the market rate for housing loans and seems to be a scheme meant to a) earn easy money for the Govt, and b) destroy the remaining assets of Retirees by implementing the equivalent of a death tax by stealth.
    TREBOR
    12th Jun 2019
    11:58pm
    That's how it looks, George....


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