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?

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Written by Ben

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