Treasurer Joe Hockey has indicated the government will be forced to increase the pension age to absorb costs associated with an aging population – which is likely to have a small but positive impact on the reawakening reverse mortgage industry.
In a speech in Washington last week, Hockey said over the next decade spending on the age pension is projected to increase by about 70% as the population aged – and this is unsustainable for the country’s budget.
Welfare “must be a safety net, not a cargo net’’ and vast numbers in society could not be allowed to remain in an entitlement culture, he said.
“Those members of the community that are able to do so must make appropriate contributions to the cost of government services.
“And all members of our community must be encouraged and assisted to enter and stay in the workforce.”
Hockey said between 2010 and 2050 the number of people of working age to support people over the age of 65 in Australia would almost halve.
Australia’s age pension age is already set to rise to 67 in 2023 – but further increases look likely.
But just because the pension eligibility age rises does not necessarily mean people retire later, Australian Seniors Finance general manager Julie Campbell told Australian Broker.
“Many retirees don’t actually choose their retirement day, unfortunately. Recent research shows up to 50% are forced out due to things like ill health and care obligations. Not having the access to the pension then would mean they have to look at other options. It’s difficult for them to find more work at 65.”
While reverse mortgage products have been lacking it recent years due to non-bank lenders losing funding access during the GFC, the market has been heating up again. According to comparison website Infochoice, there are currently seven reverse mortgage providers in Australia.
Australian Seniors Finance – whose average client is aged 72 – only re-entered the market on 1 April, having taken an 18-month break from new business. Campbell said there will be a “natural demand” for reverse mortgages as baby boomers age.
“A lot of baby boomers have a high amount of capital investment in property and generally higher expectations of lifestyle during retirement than generations before them. They are more comfortable with debt and have a different attitude towards spending the kids’ inheritance than previous generations.”
Hockey also mentioned means testing other benefits and reducing indexation for pensioners. But Campbell noted this will just make it harder for retirees.
“Many seniors find it really difficult to make ends meet anyway under the current indexation structures. A reduction in this would make it even more difficult, particular those living in city areas with high council rates or other fixed costs go to meet each year,” she said.
The 2011 census predicts home ownership in next 10 years for the sixty-plus market is expected to grow by 67% or 1 million extra homes because of the aging population.
The current reverse mortgage market size is $3.5 billion, with an average home value $325,000 and average loan size on settlement $40,000, said Campbell.
Most people use the funds to pay off mortgage or credit card debt, do home improvements, or just make ends meet. Campbell also said the lender had noticed a rise in single females taking out a reverse mortgage – a likely consequence of superannuation savings inequality.
Reverse mortgage naysayers say the product is risky and retirees may get coerced into one by people who do not have their best interests at heart.
But Campbell said new responsible lending requirements under the NCCP Act mean the lender has to make sure the borrower has the full picture with their obligations before making their final decision.
This includes informing the elder about the compounding interest effect, making sure no-one is influencing them to take the loan, and requiring them to see an independent solicitor about the proposed loan.
“One of the things we do is making sure the consumer knows about their other options, like downsizing, getting help from their family, or looking to Centrelink. If they do decide going ahead, then we make sure the loan structure is to their needs, so they’re not just taking all the money and putting it in their bank account,” said Campbell.
“We make sure they take the money sensibly.”