Reverse Mortgage Information

In November 2007, the Australian Securities and Investments Commission released Report 109, entitled “All we have is this house: Consumer experiences with reverse mortgages.” The findings of the report were based upon detailed surveys taken from 29 borrowers who had, within the three previous years, taken out a reverse mortgage with one of three unidentified lenders in NSW, and described the borrowers’ perspectives on living with the consequences of this financial decision. The stated goal of the report was to identify not only potential problem areas with reverse mortgages as financial products and how prospective borrowers may have been misled by representatives of financial institutions, but also areas where the reverse mortgage worked well.

When asked if the reverse mortgage had performed as expected, 26 of the 29 borrowers answered with an unreserved “yes,” however, two borrowers noted that, although their loans were not yet three years old, they had already exhausted their line of credit and other borrowers worried that they would “run through the money” much faster than anticipated. One borrower likened the $100,000 line of credit to the credit limit on a card that had no repayments; another, after running through a six-figure sum in two years, was forced to downsize to a much small home to repay his loan.

Obviously these individuals could not qualify as the world’s best budgeters, and equally obviously, lending institutions have enough to do without overseeing their borrowers’ spending habits. However, even for the best of accountants, it is inherently difficult to estimate the total sum that will be due at the end of a reverse mortgage, because that sum is dependant upon such unknowable factors as future interest rates and real estate values, and the number of years the borrower will remain living in the home in question.

The ASIC report identified several methods lenders could implement to assist borrowers in managing the funds accessed through a reverse mortgage; these include:

•    allowing a percentage of equity to be protected against the loan, to preserve it for the borrower’s future needs;
•    providing borrowers with a monthly statement, detailing not only the current amount owed but also debt in relation to credit limit;
•    including a forecast within the monthly statement, stating the month and year the borrower will have exhausted all available equity at the current average rate of spending; and
•    providing borrowers with personalised projections based upon realistic estimates of real estate values, interest rates, age expectancies, and the amount borrowed.

The Senior Australians Equity Release Association of Lenders (SEQUAL), the not-for-profit industry association of financial institutions writing reverse mortgages, has instituted some of the ASIC’s other recommendations, including bulletproofing the no negative equity guarantee against all possibilities short of willful neglect and fraud, and providing reverse mortgage calculators on lending institution websites that realistically reflect the effect of the loan on the home’s future equity. However, a search of the SEQUAL website did not turn up any action contemplated on the issue of borrower money management. As “all we have is this house” and poor money management has made at least one borrower lose his home, this seems an issue worth their time.

Is a house a home or an asset? Traditionally, houses have been considered homes first and assets a very poor second.

Perhaps the family home has been modified and renovated through the years, and certainly the garden has matured. However, nothing can ever alter that sense of rightness one feels upon stepping through the front door. More than a feeling of security or comfort, one has but to consider the word homesick—ill due to being away from that special place and curable only by returning—to understand the depth of that sensation.

At the same time, when viewed from the perspective of the cold world of microeconomics, the family home is strictly an asset: a major purchase, often the most major purchase, of a lifetime. It’s an investment of many years’ duration and the depository of a considerable store of funds in the form of home equity.

The bridge between these two perspectives has always been that of the sentimental asset, more properly known as an inheritance. After fulfilling its task as a home for the family, a house’s next expected role has generally been as a financial windfall to the adult children upon the passing of the parents.

However, after almost a generation of economic security and growth in Australia, this secondary role for the family home has become less important. Comprehensive and widespread education has helped raise the standard of living to such an extent that the younger generations seem to be doing rather better than their retired parents, and instead of waiting to inherit the old homestead, many of these upwardly mobile young Australians have chosen to take the plunge into home ownership on their own.

Therefore, the questions are: whose home (not house) is it? Do the adult children have residences of their own, and therefore their own sentimental assets? Do they want the old home at all, or do they intend to sell it when the time comes? Do they need the financial assistance of an inheritance from their parents, or do their parents, perhaps cash poor and asset rich, have a greater need for those funds while they’re alive?

A reverse mortgage could be the answer to this problem. By reversing the mortgage and withdrawing some of that equity saved through the years, cash-poor pensioners can fund their own retirement with their major asset, without the necessity of borrowing from their adult children, doing without the small comforts of life, or having to leave their home, retaining full ownership of their property. Arranged properly, a reverse mortgage can even reserve a percentage of that equity from ever being necessary to repay the loan, to serve as an legacy for one’s children, needed or not.

In addition to equity, there’s a large investment in sentimental value in one’s home, which must be considered during the decision-making process for funding one’s retirement. The desire to leave an inheritance for one’s offspring, no matter their age, is a strong and salutary one, however, there’s a balance to be found between that desire and the need to fund one’s retirement, between home and asset. A reverse mortgage, properly arranged, can make finding that balance easier rather than otherwise.