Borrowers have been cautioned that are not getting enough help from lenders or advisers in working out the long-term implications of taking out a reverse mortgage.
An Australian Securities and Investments Commission review of the reverse mortgage market found that there was poor consumer awareness of the risk of home equity erosion over time.
ASIC says this lack of awareness can lead borrowers to take out large reverse mortgages that can reduce their capacity to afford important future expenses, such as aged care accommodation, medical treatment and day-today living expenses.
The regulator says it will establish a working group involving lenders and other industry participants to ensure that its expectations for improved lending practices are met.
ASIC wants lenders to improve their approach to meeting their responsible lending obligations and to address the risks for consumers when they make decisions about reverse mortgages.
And it wants advisers to improve their ability to help clients understand the choices available.
ASIC deputy chair Peter Kell says: “Reverse mortgage products can help many Australians achieve a better quality of life in retirement. But our review shows that lenders and brokers need to make inquiries that would lead to a genuine conversation with customers about their possible future needs, not just a set of tick boxes on a form.”
ASIC’s review looked at reverse mortgage lending activity between 2013 and 2017, when there were around 17,000 loans. It looked at 111 loans files in detail and conducted 30 interviews with borrowers.
Lenders included Bankwest, Commonwealth Bank, Heartland Seniors Finance, Macquarie Bank and Westpac brands (St George bank, Bank of Melbourne, BankSA).
The family home is widely recognised as an untapped source of retirement income, with more than $500 billion of home equity held by people over age 65, and 70 per cent of Australians aged 55 to 85 owning their home outright.
Each of the 30 borrowers interviewed indicated that their reverse mortgage enabled them to achieve their objectives for the loan.
ASIC’s data analysis suggested that only two out of 15,053 loans were likely to reach a loan balance that exceeds the market value of the secured property by the time the borrower reaches 84 years of age (the average age at which people enter aged care), assuming that interest rates are stable and property prices rise by 3 per cent a year.
However, if rates rise by an average of 3 per cent, about 6 per cent of borrowers are likely to rely on the no negative equity guarantee.
ASIC found that there was poor awareness of the risk of equity erosion over time.
“The interest charges that accrue over time can reduce the capacity of borrowers to afford important future expenses, such as aged care accommodation, medical treatment and day-today living expenses,” the review says.
“This is concerning because our data analysis indicates that borrowers tended to apply for the maximum credit limit that had been permitted by their lender. Some borrowers reported that their broker or lender had recommended applying for the maximum possible credit limit.
“Our review suggested that most borrowers had not considered the long-term implications of taking out a reverse mortgage.
“Our loan file review indicated that the application process of all five lenders focused on the borrower’s short-term objectives, while limited or no attention was paid to their possible future needs.
The review says inquiries made by licensees lacked sufficient detail and followed a tick-box formula. About 92 per cent of the loan files we reviewed did not record the possible future needs of the borrower in sufficient detail and contained no evidence that the broker or lender had discussed how a loan may affect the borrower’s ability to afford possible future needs.
“Licensees have an important role to play in ensuring that potential reverse mortgages are not unsuitable,” ASIC says.
“Our consultations with lenders and industry bodies representing brokers, financial advisers, accountants, legal practitioners and financial counsellors found that these professionals had been reluctant to give guidance about reverse mortgages.
“This reluctance was attributable to negative perceptions about the product, limited awareness about the product and a desire to avoid the perceived risk of providing unlicensed credit assistance by recommending the product.”
Another issue was elder abuse. ASIC’s loan file review identified 15 loan applications where a lender could have detected a sign of possible financial elder abuse and made further inquiries to identify whether abuse may have been occurring.
ASIC also detected some unfair contract terms, including unilateral variation clauses, giving lenders a broad discretion to vary terms and conditions; entire agreement clauses, which absolve the lender from responsibility for conduct or representations made to the borrower outside the loan contract; and non-monetary default clauses, which give lenders a broad discretion about what events or circumstances it treats as a default.