ASIC has brought reverse mortgages into the spotlight as they are currently reviewing the practices of CBA, Bankwest, Westpac, Macquarie and Heartland Seniors Finance over their “tick box” approach to Reverse Mortgages. Many of you may be asking “what is a reverse mortgage”?
What is a Reverse Mortgage?
Essentially, it is a loan that allows you to borrow money against your home by using the equity built up in your home as the security.
This type of loan could be taken as a lump sum, a regular income stream, a line of credit, or a combination of these payments.
With this type of loan, although there aren’t repayments while you live in your home, there is interest charged like any other loan. The interest will compound over time and added onto your loan balance.
These types of mortgages are usually taken out by retirees to compliment their lifestyles and provide an additional income stream during retirement years. However, there are many long term financial risks when taking out these loans.
As these loans are mainly taken out by retirees, the loan must be repaid in full (including interest and fees) when you move into aged care, decide to sell, move out, or pass away. Until this time, you are able to stay and live in your own home- accumulating interest and reducing the value of your estate.
We advise that if you are considering taking out a reverse mortgage that you seek independent financial and legal advice as well as speak to your family as there may be other ways to obtain funds in your retirement years.
The current ASIC review of reverse mortgage lending in Australia found that borrowers typically do not recognise or fully understand the long-term risk of taking out this type of loan.
The banks were found to be taking a “tick the box” approach to issuing reverse mortgages rather than considering individual circumstances and needs.
There are large risks when taking out a reverse mortgage, the main risk being severe financial distress later in life.
Some of the risks associated with these loans:
- The payments may impact your pension eligibility.
- The banks will offer higher interest rates and charge higher ongoing fees than the average home loan.
- As you are aging in life, your debts will increase as interest rises on your loan.
- Debts will increase quickly as the interest compounds over time.
- The value of your home is not guaranteed to always rise, and if the value of your home falls, you may have less money than expected for future medical treatment or aged care.
- May be high break costs involved.
- In some circumstances, if you have someone living with you not on the mortgage, such as children, family or friends, that person may not be able to stay if you move out, or pass away as the bank will need to recoup their loan.
In ASIC’s review, they found that Bank’s were not doing enough to explain the impact to consumers future financial situation or the impact to money left in their estate. ASIC also found that 92 percent of the loan files reviewed showed no evidence that the broker had discussed all the risks to the borrower and the impact to their future needs. They also had not documented the borrowers short term exit strategy or whether they intend to remain in the loan indefinitely.
Government intervention- Negative equity protection
On 18 September 2012, the Government introduced statutory ‘negative equity protection’ on all new reverse mortgage contracts. This means you cannot end up owing the lender more than your home is worth (the market value or equity).
When the loan contract ends and your home is sold, the lender will receive the proceeds of the sale and you cannot be held liable for any debt in excess of this (except in certain circumstances such as fraud or misrepresentation). Of course, where your home sells for more than the amount owed to the lender, you or your estate will receive the extra funds.
The future of reverse mortgages
The Banks have commented during the ASIC review that due to the complexity of reverse mortgages and the relatively small market size, and the negative perception of the products, there are questions over whether it is worth banks’ while to offer these loans. It is understood Westpac hit the pause button on new lending in part due to the regulatory uncertainty.
At least, for the moment, the banks are being held accountable for their lending practices and banks are considering whether they will continue to offer reverse mortgages as a form of lending.