Demand for reverse mortgages is increasing as poor investment markets leave older retirees strapped for cash.
Superannuation funds are said to be weighing up whether they should offer reverse mortgages to their retiree members. If the talk comes to something, the market for reverse mortgages would be greatly expanded.
Super funds are about providing retirement income for their members and for many of those people, their retirement savings will not buy much more than a new car and some maintenance on the house. Cash-poor retirees are increasingly going to look favourably upon unlocking some of the equity in their homes.
Also known as "equity-release" products, reverse mortgages are available to home-owning over-65s or over-60s (depending on the provider), who borrow against their homes and make repayments on the loan. But as the interest and fees are capitalised, the outstanding loan amount grows quickly. The loan is repaid when the owner goes into a retirement home or an aged-care facility, or dies.
In its latest survey of the reverse-mortgage market, Deloitte says there was about $3.3 billion in funding at the end of last year, a 22.5 per cent increase over the past two years. About 5000 new borrowers accessed equity in their homes last year, with more than 42,000 reverse mortgages in total.
Many retirees' investment portfolios have been hit hard by the dreadful investment returns of the past five years, which makes the attraction of reverse mortgages understandable.
Retirees may not be generating enough money from their savings and the age pension to provide for their living expenses or to maintain their home. They want to keep their financial independence without being a burden on others. A reverse mortgage could also be used to help pay for home-based care, even if it means less left in equity in the house for the children.
The average age of new borrowers last year was 75, and borrowers told Deloitte they used the money to make home improvements (18 per cent), repay debts (16 per cent) and supplement retirement income (15 per cent).
Reverse mortgages can be a good solution for some people as long as they are careful and borrow only relatively small amounts.
With interest rates low and likely to go lower, not many people are interested in taking out a reverse mortgage with an interest rate that is fixed for a period of time, and providers are generally not offering fixed-interest loans. While a variable interest rate may go lower in the near term, it's bound to rise over the period of the loan, which is likely to be least a decade for most people. Higher interest rates will make the debt grow even more quickly.
The single-biggest potential danger is where the debt blows out to be worth more than the house.
Reverse-mortgage providers who are members of industry body SEQUAL (Senior Australians Equity Release Association of Lenders), and the better providers, have "no negative-equity guarantees" whereby, if there is a shortfall in covering the debt on the sale of the house, the lender wears the loss.
There are conditions in reverse-mortgage contracts, such as maintaining the property to the standard required by the lender. If the borrowers fail to maintain the house, the "no negative-equity guarantee" may be rendered void.
It is essential to obtain independent legal advice on the contract, as well as advice on whether a reverse mortgage will affect social security entitlements.
Many people would prefer to have a reverse mortgage provided by their super fund.
Big super funds have buying power, which can mean lower prices for members. The big super funds offer good deals to members on life insurance, for example. If reverse mortgages were to be offered by super funds, they could be on better terms, such as lower interest rates and more consumer-favourable contracts, than from established players.