Reverse Mortgages: In Retreat in Australia

The reverse-mortgage market is in full retreat in Australia, with the fourth lender this year announcing it is pulling back.

Reverse mortgages have been headline news in Australia and New Zealand for several years as a retirement funding solution for seniors who are asset rich but cash poor. A way to cash in on your, normally unintentional nest egg of your home.

With a reverse mortgage, borrowers establish a loan facility and then draw down the amount in a series of withdrawals over a period of time. Typically borrowers are protected from negative equity and are guaranteed their home until death or until they choose to sell (to move into a nursing home for example). Borrowers can arrange a series of lump sum drawdowns, or a regular income stream.

However with increasing interest rates the profit margins have obviously decreased.  And for reverse mortgage borrowers if their lender goes out of business it can be potentially inconvenient because they may find their planned draw downs or income stream is disrupted.

In contrast in Australasia if a non-bank lender goes out of business its not too serious for the borrower. The mortgage is held by an independent trustee. If the lender goes broke or withdraws service, the trustee has the power to arrange another lender to take over the servicing of the mortgage. There is no disruption to the borrower.

Over Fifty Group announced last month it had suspended reverse-mortgage lending. It has $230 million in reverse mortgages on its books and says it will continue servicing existing customers. Earlier this year Macquarie Bank withdrew its reverse mortgage from the market.

Australian Seniors Finance has limited its distribution to credit union partner channels. Bluestone took similar action, cutting off the broker channel and limiting distribution to its partners Westpac (in New Zealand only) and credit unions.

So now there are more limited options for people considering a reverse mortgage and greater risk that the the company that holds their reverse mortgage may not meet its obligations. Reports are that there were $466 million of reverse mortgage settlements last year. Of all those mortgages 75% of the loans were not drawn down to the approved limit: borrowers want to keep some credit available for the future.  Ten percent of those borrowers had opted for an income stream too.

It seems unlikely though that the market will disappear entirely. ABN Amro has released a new product which allows reverse mortgages secured against rental properties and Suncorp had a successful launch of a reverse mortgage product last November.

ABN Amro’s director of reverse mortgages, Martin Lynch does say that the market has changed:

“Because of rising interest rates, the lifestyle borrowers have disappeared. These are the people who don’t need the money to buy a new car or repair the roof but would like some extra money for travel or to improve their quality of life in retirement in other ways.”

Photo credit: scottwills