| |

"Borrowers had a poor understanding of the risks and future costs" of "reverse mortgages : ASIC

BIScom Subsection: 
Editorial Staff

Australia's ASIC has undertaken an extensive review of so-called "reverse mortgages" which are actual mortgages with potentially catastrophic long-tail results, which may be one of the things that borrowers did not understand. The findings of the review are startling.

ASIC reviewed data on 17,000 "reverse mortgages", 111 consumer loan files, lender policies, procedures, and complaints and commissioned in-depth interviews with 30 borrowers and consulted over 30 industry and consumer "stakeholders".

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 upon their ability to afford their possible future needs. In nearly all of the loan files 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 die or decide to move out. However, depending on when a borrower obtains their loan, how much they borrow and economic conditions (property prices and interest rates) they may not have enough equity remaining in the home for longer term needs (e.g. old age care).

ASIC’s report also finds that lenders can help to reduce the risk of abuse of the elderly. 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.

So-called "reverse mortgages" are a credit product that allows older people to borrow using the equity in their home. A more sensible name is "equity release mortgage." The loan can be paid off at any time but there is no obligation to do so until a later time, typically when the borrower has vacated the property or died. They are a more expensive form of credit compared to standard variable owner occupier home loans; ASIC found that the interest rates are typically 2% higher and, as there are no repayments required, compound interest accrues.

Consumer demand for equity release mortgages in Australia has grown gradually since the global financial crisis, with the total exposure of ADIs to such loans increasing from AUD1,300 million in March 2008 to AUD2,500 million by December 2017.

However, it is not clear that this increase is attributable to the global financial crisis: an ageing population is one aspect and so is the fact that family homes have long been a source of capital for parents to provide for their children needs. Education for grandchildren, support for nascent businesses and the like are examples of why the elderly might want a lump sum.

ASIC's review examined five brands, who collectively lent 99% of the dollar value of approved equity release mortgage loans in 2013-17. These brands were: Bankwest, Commonwealth Bank, Heartland Seniors Finance, Macquarie Bank and Westpac (comprising St George Bank, the Bank of Melbourne and BankSA). As of late 2017, Macquarie Bank and Westpac are no longer providing new mortgages of this type. The banks are exposed in the event of a property crash and could find their balance sheets adversely affected where loans were granted against properties at high prices - a situation which has long been a threat in Australia as house prices have risen inexorably and, some might say, inexplicably, with many thinking that, in some parts of the country, the growth has topped out.

Further reading: