POPI GM Brenton Harris and HouseNet.com.au creator Darren Moffatt discuss whether reverse mortgages are the best option for your clients.
Thousands of Australian retirees have taken out reverse mortgages on their homes, but is it the best option for your older clients?
POPI general manager Brenton Harris doesn’t think so. He believes the majority of reverse mortgage holders start off with the best of intentions, only to find themselves in financial ruin later on down the track.
“The worst problem with reverse mortgages is the misuse of funds. Everyone starts out with all the best intentions of only drawing out a little bit, and they end up drawing the thing down to its limit within, what we’re seeing, a couple of years. And then they’re on the slippery slope really, because the capitalising interest starts to get away from them.”
Harris says he’s even come across one older client who had a drawer filled with unopened monthly envelopes from the bank, because she couldn’t bear to see the interest going on top of the loan each month.
“From what we’ve seen, people get very stressed about them,” he adds. “The government has legislated no negative equity guarantee, and that kind of says something, in my opinion – that even the government thinks that retirees are at extreme risk of ending up with nothing in their home, hence they have to legislate it.
“Australia is ageing, and the cold, harsh reality is that more and more are aged pension-reliant and either without any superannuation at all or limited funds at best. They are struggling to meet the costs of living, let alone have money for the nicer things in life.” But Darren Moffatt, creator of mortgage sites housenet.com.au and reversemortgagewatch.com.au, says the idea that most reverse mortgage holders end up financially ruined is “completely incorrect”.
“I can tell you I’ve done a very, very large number of these transactions over the years, and the vast majority of people choose to boost their pension and they use most of the money gradually over time. Obviously, there are a small minority who take out lump sums or spend the money to repay existing debt.”
Moffatt says a ‘typical’ reverse mortgage holder will use a small sum to buy a car or do urgent repairs. “By doing it this way, the cost is extremely modest, but it also doesn’t have any implications for their pension, which can be the difference between this and other equity-release schemes.”
However, Moffatt acknowledges the validity of reversion schemes or equity products, like POPI. “Generally, as a rule, these…have a place in the market; I’m not disputing that. My experience is that those schemes are better where someone has a need for a larger lump sum, like to extinguish an existing mortgage debt. For those types of clients, home reversion or pure equity work well. But my experience is the vast majority of seniors want their money gradually over time. So, on that basis, the reverse mortgage is a good option.”
Yet Harris maintains that these situations are actually few and far between.
“[Reverse mortgages work] where someone has only taken a very small percentage, usually of a property that is in a very high-growth area and is of reasonably significant value. So someone may have a $700k property and they’ve taken a $50k reverse mortgage to do some repairs on the property, which in fact helps its value. That’s generally where you can say, ‘Well, the reverse mortgage, yes, it’s going to increase in value, but as a percentage of the overall property value, it’s not too bad’.”
One of the key differences between a POPI and a reverse mortgage, he says, is that there’s no loan with a POPI, so there’s no risk of capitalising interest ‘eating away’ at equity.
“The other key difference in a POPI is a transfer of risk. With a reverse mortgage, the property owner takes on the risk of what the property market’s performance is going to do, whereas with a POPI they’re transferring that risk to an investor. They’re still benefiting from it from a cash-flow perspective, but not taking on the risk that property markets fall or… stay flat.”
Both agree the final decision comes down to the individual borrower, but what should be done with the majority of clients remains up for discussion. “It all depends on the client… under NCCP we have to make individual assessments,” notes Moffatt.
“There is a fairly typical reverse mortgage profile, and that’s someone who owns a property of roughly average value for their area and has very little other assets or superannuations – your typical retired person in Australia. Those people are using a small lump sum, like less than $30–40k, but then they want additional monies available to supplement their pension over 10 to 20 years. That’s where the reverse mortgage product works very, very well.”
However, Harris remains convinced that reverse mortgages are only successful in a minority of cases and must be investigated with caution.
“I’m a financial planner and mortgage broker by profession, and I have done reverse mortgages in the past as a broker, which kind of led myself and my business partner Sean to create POPI. We’re in the business of building a happy client base, and I think a reverse mortgage is actually the opposite. You’re actually building a client base that’s going to end up very unhappy and, for me, that’s just not good business.”