University to probe reverse mortgages

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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

28 Comments

Total Comments: 28
  1. 0
    0

    More than 5.25% interest. Joking?

  2. 0
    0

    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.

    • 0
      0

      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.

  3. 0
    0

    Easy to figure out. If the government has created a scheme for pensioners it’s going to be shonky. Run the other way.

  4. 0
    0

    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.

  5. 0
    0

    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.

    • 0
      0

      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.

  6. 0
    0

    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.

  7. 0
    0

    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.

    • 0
      0

      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…

    • 0
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      If they are ” have nots” there is nothing to pass on is there. You are not making sense.

    • 0
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      Ah – but left alone they would not be total have-nots, eh? I always make sense….

  8. 0
    0

    “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?

    • 0
      0

      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.

    • 0
      0

      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.

  9. 0
    0

    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?

  10. 0
    0

    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.

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