ASIC review into reverse mortgages

by Rebecca Pike29 Aug 2018

A review into reverse mortgages has found that while they do allow older Australians to achieve their immediate financial goals, longer term challenges do exist.

The Australian Securities and Investments Commission (ASIC) reviewed data on 17,000 reverse mortgages, 111 consumer loan files, lender policies, procedures, and complaints.

The group also held interviews with 30 borrowers and consulted more than 30 industry and consumer stakeholders.

Reverse mortgages allow older Australians who own their home with few other assets to draw on the wealth locked up in their homes, while they continue to live in their property.

According to the report, “Each of the 30 borrowers in our consumer research reported feeling satisfied that their reverse mortgage had enabled them to address their immediate financial objectives.

“Each of these borrowers had been focused almost exclusively on resolving their immediate financial needs and paid little to no attention to the longer term implications of their loan.”

The review found borrowers had a poor understanding of the risks and future costs of their loan, and generally failed to consider how their loan could impact their ability to afford their possible future needs.

ASIC found that lenders have a clear role to play and need to do more. For nearly all of the loan files which were reviewed, the borrower’s long term needs or financial objectives were not adequately documented.

Under legal protections in place since 2012 borrowers can never owe the bank more than the value of their property and can remain in their home until they pass away or decide to move out.

However, depending on when a borrower obtains their loan, how much they borrow, and economic conditions they may not have enough equity remaining in the home for longer term needs, such as aged care.

ASIC deputy chair Peter Kell said, “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 report also found there is an opportunity for lenders to reduce the risk of elder abuse. Under the new Code of Banking Practice, recently approved by ASIC, banks will be required to take extra care with customers who may be vulnerable, including those who are experiencing elder abuse.

The review also found consumers also had limited choices for finding a reverse mortgage. Several providers withdrew from the market after the global financial crisis.

From 2013 to 2017, only two credit licensees provided 80% of the dollar value of new loans from 2013 to 2017.

Heartland Seniors Finance specialises in reverse mortgages and helped ASIC during the review.

In a statement the lender said the report was “thorough” and “balanced”.

Responding to the concerns ASIC raised, Heartland said, “Heartland is also committed to ensuring that our customers make informed decisions and is very much aligned with ASIC in this respect.  We have already made a number of changes since the review commenced and have agreed to participate in an ASIC working group to improve lending practices.

“Overall, the report is very thorough, balanced and highlights the increasing need for the use of reverse mortgages as a form of equity release in Australia.”