Bina Brown examines reverse mortgages.
IT SOUNDS too good to be true, but you really can extract funds from your home. Called a reverse mortgage, how much you can gain access to depends on the provider.
While the credit crunch has meant some big-name lenders have withdrawn from the reverse mortgage market, all the signs point to them continuing to be in demand.
A relatively new product, reverse mortgages are just one option for people older than 60 who are asset-rich but cash-poor - that is, with the bulk of their wealth in their home and without extra capital or income for a comfortable retirement.
A reverse mortgage is when money is borrowed against the equity in a person's home. The loan amount and the interest is not repaid until the home is sold, usually when the person dies or moves out into, say, assisted living.
The amount owing depends on whether the reverse mortgage is taken as a lump sum or a regular income stream, and for how long, the interest rate charged and the value of the property. Most lenders provide a "no negative equity guarantee" which ensures a borrower never owes more than their house is worth.
Macquarie Bank, Resi and Bluestone Group no longer accept new reverse mortgage business and Australian Seniors Finance has cut back its reverse mortgage broker-initiated business. That leaves the main providers as ABN Amro, Over Fifty Group, Vision Equity Living (in NSW), St George Bank, Commonwealth Bank, BankWest and Suncorp.
Kieren Dell, executive director of Senior Australians Equity Release Association of Lenders, the peak reverse mortgage industry association, says the consolidation within the market is due to the credit crisis and the lack of liquidity. Non-bank lenders are having difficulty finding reverse mortgage funds (indeed, any mortgage funds) by way of securitisation or by simply selling tranches of mortgages on the open market at a reasonable price or at all.
"This has meant that a number of lenders have decided that the price for selling these mortgages [the price the market desires] is too high for them to provide a reasonable rate for consumers for the time being," says Dell. "There are many opinions on where this will head, but I suspect most of the non-bank lenders who are currently withdrawing will return to the market when it returns to normal - whenever that is.".
ABN Amro's director of reverse mortgages Martin Lynch says the bank is definitely in for the long-term, particularly as the need for reverse mortgages "certainly isn't going away".
"There are rising fuel costs and rising food prices with no rise in the Government pension," says Lynch. "Meanwhile people are sitting on a major asset. For many people it is a way out of living a tough existence in retirement."
OPTIONS IN TOUGH TIMES
Reverse mortgage brokers are reporting a sharp in inquiries for new business as well as concern about lenders pulling out of the market.
Craig Swan, principal of Seniors Equity Direct, says clients with an existing loan through one of the lenders no longer taking on new business should not be affected by their withdrawal. However a problem could arise if a client who was entitled to, say, $80,000 had only taken $40,000.
"The problem they face is they may no longer be able to get the additional funding through the same lender," says Swan. In this case, the options include going to another lender (which could be time-consuming and expensive), downsizing or going without. An exception would be if the money was taken on cash reserve and a facility was set up.
"Every time a lender exits the market it does send shock waves through the industry. Potential customers are less inclined to do anything that appears risky," says Swan.
That said, when the nervousness subsides, he expects there will be a build-up of people wanting to gain access to the equity in their home.
"It is not an option for everyone but for those people who have considered their options, a reverse mortgage can be a good solution to a cash flow problem," says Swan.
Specialist broker Louise Skilbeck of Fifty Plus Finance says inquiries have ped from 10 every week a year ago to one a week, but she maintains the need for reverse mortgages as a legitimate retirement tool. "It is not for everyone and it needs to be sold with safeguards but for many people it gives the opportunity to live life with financial freedom and dignity," Skilbeck says.