Reverse mortgages back in vogue

by Calida Smylie14 Mar 2014
The move by two major funders to offer reverse mortgages again is an indicator the market is picking up since the global financial crisis, the general manager of a mortgage servicing company said.

“When reverse mortgages coming back that’s when I know the market’s coming back. Because funders willing to fund reverse mortgages means the cost of funding is coming down and they are happy to take a more long-term view of the market,” said Chris Evans, business development and relationships general manager at First Mortgage Services (FMS).

This week, Macquarie Bank announced it is targeting retirees again by releasing a reverse mortgage and an accommodation bond loan. Both products have a maximum LVR of 45% and are available to customers over 70 years old.

And New Zealand lender Heartland Bank announced a deal last month to buy the Australian Seniors Finance business and Sentinel in New Zealand for NZ$87 million from the Quadrant Private Equity-controlled Seniors Money International. The bank said its decision to invest in reverse mortgage business is consistent with its strategy of pursuing niche lending opportunities.

Australian Seniors Finance is the biggest non-bank reverse-mortgage provider in Australia, with around 20% of the market. Sentinel is the biggest provider of reverse mortgages in New Zealand, with a market share of around 80%.

The deal is to be settled on 1 April.

FMS does the mortgage processing for Sentinel and Macquarie. Evans said having new players to the market is a good sign.

“You know funders are okay with the market when they start funding reverse mortgages again.”
A reverse mortgage is useful for cash-poor asset-rich retirees who want extra cash flow or fund an accommodation bond, he said.

While there are some risks to reverse mortgages – interest rates are higher than average and debt can quickly rise – Evans thinks because lenders are not advancing the full value of the home (usually just up to 30% to 45 % of LVR) the risk is lessened.

Evans said one of the main objectors to reverse mortgages is the borrower’s children.

“Children who think they’re going to get a large inheritance often dispute the reverse mortgage because they think it’s taking away from their inheritance. I don’t really agree with that – I think it’s [the borrower’s] house, they should enjoy it.”

He pressed his own parents to take out a reverse mortgage pre-GFC.

“I said ‘don’t spend your money on me, go out, go travelling, and have a good time’. I don’t want any of their money. When I get to that age I wouldn’t mind taking one out too.”

But many lenders, such as Acuity Funding, do not offer reverse mortgages because of the risk involved.

Acuity managing director Ranjit Thambyrajah said his company refuses to get involved with reverse mortgages because vulnerable elderly can be taken advantage of by people pressing them to get a reverse mortgage on their home so they can get cash for themselves.

“Acuity Funding has made it a policy not to be involved in reverse mortgages for the specific reason that this facility is often used to assist others and not the borrower,” he said.

He said on many occasions a client has come to Acuity to try and rescue their parents’ home after this has happened, but the damage is already done.

When announcing its reverse mortgage option, Macquarie said customers would be protected from owing more than their home was worth through a no-negative-equity guarantee. All reverse mortgage and accommodation bond borrowers will have to provide evidence of financial and legal advice before a loan can be granted.

Professional services firm Deloitte released a report last September concluding the reverse mortgage market is not living up to its full potential and risks becoming a missed opportunity.

Currently there are less than five active lenders offering the product – having reduced from more than 15 before the GFC.

But Deloitte partner James Hickey said the financial services industry is seeing significant interest in the product from ‘active’ retirees aged in their 60s and early 70s.

“These are senior Australians who want to travel and renovate their homes, as well as settle their debts and enjoy their new found freedom without having to significantly tap into their superannuation, or downsize their homes.”

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