Reverse mortgages 'just not good business', argues broker

by Mackenzie McCarty07 Jun 2013

Thousands of Australian retirees have taken out a reverse mortgage on their home – but is it the best option for your older clients?

POPI general manager, Brenton Harris, doesn’t think so. He believes many 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.”

But Darren Moffatt, creator of mortgage sties and, says the idea that the majority of 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 mort lender 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.”

But Harris believes 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’.”

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’.

“What we see are banks offering these wonderfully-pictured graphs where they’ve got two smooth lines, one with the property value going up, one with the reverse mortgage going up and most of the time they pitch it so they say ‘look – your equity is the same after 20 years. Although the loan’s a lot higher, so is your property and look, you’ve still got the equity you started with’. With a POPI, that’s always the case because you’re not eating into it, you’re not selling part of your house. You’re only really selling in the future.”

“The other key difference is 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 property markets stay flat, that they’re losing and eroding away on equity.”

Both Harris and Moffatt can agree that the final decision comes down to the individual client, 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 reverses 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 moneys available to supplement their pension over ten to twenty years. That’s where the reverse mort 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.”


  • by PeterT 7/06/2013 11:11:08 AM

    I think reverse mortgages can be applied well or badly. The outcome depends on the planning and implementation. That said, it's a tricky topic with a lot of room for error and if it goes badly it won't reflect well on the broker. With so much A grade business available, I'm happy to leave this to others.

  • by Greg R 7/06/2013 11:32:13 AM

    A serious discussion would have been preferred to one where a provider is trying to promote a new (old) product. The reversion product is based on capital growth, otherwise there is no basis for this product for investors, hence the restrictions of the Homesafe product in terms of postcode and property types. This will be no different.

    With the no negative equity guarantee, reverse mortgage lenders are extremely unlikely to be lending where there may even be a possibility of this occuring, so the emotive scare words above carries little in the way of accuracy.

    A reverse mortgage is not a perfect solution but it is often a better solution than alternatives for seniors. Many do not want to sell and downsize (even if they could live in the same area), the dollar costs and emotional upheaval is often too great to warrant. Unlikely or unable to be able to get back into the paid workforce, not in a position or too proud to ask for help from adult children, the alternatives are continuing tightening their belts or be forced into a sale if they have existing unpaid debts.

    If they just want an extra $20k to $50k, a reverse mortgage may well be a far better alternative for their lifestyle and well being than anything else.

    Good to see another option for seniors but it would carry greater weight if the marketing strategy was not based on criticizing another product.

  • by Rastafarian 7/06/2013 1:47:25 PM

    Do what is in the best interests of the client. The people I've seen and set up with reverse Mortgages get all the information prior to applying, I do charts based on current growth and on zero growth so they can be fully aware of where they will be in the future or what will be left for any inheritance. I've found the ones who are really against the elderly having equity release , are those who think they should be inheriting it, not see it going to the lender years down the track, or 80% anyway.
    Personally I would rather see my parents reverse mortgage their home , get the money to use now, stay in the home they are used to, and have some fun while they still can if they want, I don't want or need to inherit their home, they worked for it, and it's up to them to decide if they want to use the equity or not.
    Well informed client , full transparency, and good service, make the RM a good product to have in your tool kit.