How can reverse mortgages help Aussies age at home?

By Lucy Dean

September 27 2017
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One in five older Aussies end up in aged care accommodation despite wanting to stay at home, but reverse mortgages could be a solution.

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Recent research from the Journal of Housing For the Elderly reveals that while 75 per cent of Aussie pre-retirees in 1994 expressed a preference for ageing at home, just 67 per cent succeeded in doing so during their retirement years.

Additionally, while just 5 per cent expressed a desire to age in residential care, 17 per cent were reported to enter into residential care home programs.

To RMIT researchers Stuart Thomas and Ashton de Silva, it’s easy to see why older Aussie’s prefer to age at home.

Writing in partnership with reverse mortgage provider Heartland Seniors Finance, they explained: “This desire is strong [because of]… an emotional attachment to the place where they raised their family, social connections to community and services and comfort and familiarity with their area.

“From a financial perspective, many see the value of their home as a form of precautionary savings.”

In recent weeks, the issue of retirees outliving their savings has come to the fore, with the Actuaries Institute Australia saying the need for longevity protection “cannot be ignored”.

Commenting on longevity risk, the researchers wrote: “Australian retirees face an unusual mix of financial challenges — relatively high exposure to investment risk, high rates of home ownership and low exposure to health risks.

“It’s vital then that this next phase of financial life, the decumulation phase, is planned for and strategically managed so that in retirement we minimise the risk of outliving our accumulated wealth.”

They explained that the decumulation phase is the period after retirement, when retirees begin dipping into their accumulated savings.

“A carefully designed wealth decumulation plan will be vitally important in the lead-up to this phase – to generate income from savings and to manage risks."

They continued: “We naturally think about our superannuation savings first, but other (non-super) investments, whether they are in cash, securities or property, and maybe even the family home should also be part of our planning.”

The researchers argued that, while most retiree households “do not generally consider” using their housing wealth in retirement plans, they should.

Acknowledging that transaction costs, connections with the home and location, the limitations of the age pension, the desire to self-insure against potential long-term care expenses and bequest motives are “valid concerns to some degree”, the researchers said retirees should nevertheless consider accessing the wealth in the family home.

Downsizing is a potential path, but, as with moving into aged care, this requires severing ties with the family home and potentially retirees’ communities while possibly increasing discomfort, the researchers said.

“Other options are available such as reverse mortgages (where you borrow against the value of your home) and home equity reversion arrangements (where you ‘sell’ part of your home in a financial contract).”

However, in order for retirees to pursue these options, there needs to be greater awareness and information about products and processes.

“While there are some financial products available that can assist with accessing the wealth tied up in the family home, such as reverse mortgage and home reversion products, they are small in number and not well understood,” the researchers said.

“It’s clear that the financial markets, policy makers and market regulators have not just a business opportunity but a social imperative to build safe, flexible financial products for Australian retirees.”

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Retirement