Many Australian retirees are cash-poor but asset-rich, meaning they have substantial equity in their homes, but limited cash in the bank.
Despite a record-high property market since the GFC and historically low interest rates, retirees are still reluctant to release the equity in their homes, according to the University of New South Wales (UNSW).
“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 senior research fellow at UNSW, Dr Katja Hanewald.
What is a reverse mortgage?
A reverse mortgage allows home owners to borrow money using the equity in their homes, including their principal place of residence, as security.
Home owners aren’t required to make repayments while they still live in their home. Interest is still charged as normal, but it can compound and be added to the outstanding loan balance.
Reverse mortgages are more popular with older home owners, because the loan must be repaid in full when the home is sold or moved out of, typically triggered when the home owner dies or moves into aged care.
According to ASIC, consumer demand for mortgages has gradually risen since the 2008 GFC, but most Australian consumers still have negative perceptions.
“A common view amongst retirees – and even many finance brokers and lenders – tends to be that equity release products take advantage of vulnerable elderly people, or that they are often used by family members to do so,” ASIC said in its 2018 review of reverse mortgage lending in Australia.
While fewer investors have taken up the opportunity to release the equity in their home domestically, internationally it has been used as a popular means of funding retirement.
Dr Joshua Funder, CEO and founder of Household Capital, said: “Overseas markets have been expanding rapidly to provide access to home equity to fund retirement.”
The corporate regulator has flagged the risk of elder abuse with reverse mortgage structures.
In a 2018 report, ASIC found that borrowers were on average 75 years or older when they took out a reverse mortgage, and the corporate regulator’s loan file identified 15 loan applications where a lender could have detected signs of abuse.
Signs included money being transferred to a non-borrower, the involvement of children in the application, file notes indicating abuse by a sibling of the borrower.