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December 10, 2018

Reverse mortgages: what you are getting into

A typical reverse mortgage starts out around $60,000 and grows to $120,000 over its seven-year life – an average loan-to-valuation ratio of 25 per cent. Most borrowers pay some of the loan off along the way, and by the time the loan is paid off the average outstanding is $113,000.

These figures come from Heartland Group, Australia’s biggest lender of reverse mortgages, which has provided an insight into a market that has been slow to take off in Australia because of fears about long-term home equity erosion.

In 2014, Heartland acquired reverse mortgage lenders Sentinel New Zealand and Australian Seniors Finance from Seniors Money International. Heartland is the biggest reverse mortgage provider in New Zealand with an estimated 80 per cent market share. In Australia, it claims market leadership with a 20 per cent share.

In a presentation to investors, the chief executive of Heartland Seniors Finance, Andrew Ford, said the company was keen to build on its position and grow the market.

Ford says reverse mortgages are a core product for Heartland, making up 28 per cent of its finance receivables. The company’s reverse mortgage business is growing at 18 per cent a year in Australia and 11 per cent a year in New Zealand.

Ford says the market is one that suits a specialist provider. “The biggest challenge is to increase awareness and understanding of the product,” he says.

In August, the Australian Securities and Investments Commission raised concerns about reverse mortgages, when it released a review calling for lenders to improve their approach to meeting responsible lending obligations and to do a better job of helping consumers understand the risks they take on when they use a reverse mortgage.

ASIC’s concern is that borrowers are not getting enough help from lenders or advisers in working out the long-term implications of taking out a reverse mortgage. It found there was poor consumer awareness of the risk of home equity erosion over time.

The regulator says this lack of awareness could lead borrowers to take out a large reverse mortgage that could reduce their capacity to afford important future expenses, such as aged care accommodation, medical treatment and day-today living expenses.

In Australia, Heartland’s average initial reverse mortgage loan is $62,000, with an initial loan-to-valuation ratio of 12 per cent.

The overall average loan size of the book currently is $120,000, at an average loan to valuation ratio of 25 per cent. The weighted age of the loan book is 6.1 years and the median term at repayment is 7.4 years, when the average LVR is 27 per cent of the original valuation.

What this means is that borrowers start out with loans around $60,000 and as interest capitalises over a median term of 7.4 years the amount of debt grows to an average of around $120,000, which represents about a quarter of the value of the home.

Heartland says only 0.3 per cent of its loans are on LVRs of more than 75 per cent. Ninety per cent of its loans have LVRs under 40 per cent.

Borrowers can choose to draw a lump sum, have funds set aside for future needs via a line of credit or receive a regular income. Just over half (51 per cent) of loans are to joint borrowers, 34 per cent are to sole females and 15 per cent are to sole males.

Heartland says 77 per cent of repayments are voluntary, which means they usually occur as a result of downsizing.

It says a typical borrower has run down their super and other assets, they are receiving a pension and want to supplement that income. Typical uses for funds include renovations, travel, medical expenses, buying a car, aged care, debt consolidation, mortgage refinance, support next generation and pay everyday living expenses.

Heartland keeps track of the risk of loans entering negative equity by having an independent group monitor the loans and produce a valuation report quarterly.

Heartland has done some stress test scenarios. In one scenario property values fell by 10 per cent and then resumed growing by 2 per cent a year. The borrower is age 69 and takes out a loan with an LVR of 25 per cent. The borrower would go into negative equity territory after 29 years, aged 98.

In a much more severe scenario, the house value falls 35 per cent and there is no recovery in value through the term of the loan. With a loan on an LVR of 25 per cent, the 69 year-old borrower would enter negative territory after 13 years, at age 82.

The company says it has made a number of changes in response to ASIC’s review and it is participating in an ongoing working group that is looking at further improvements to lending standards.