We are all familiar with the challenges Australia faces in supporting our growing aged population. Retired couples can now expect to live 25 to 30 years post-retirement, but the median household superannuation savings at retirement are $200,000; Baby Boomers’ superannuation will only support 10 to 15 years of comfortable income, leaving them to eke out their later years on the inadequate age pension.
Australian retirees, individually and as a cohort, have saved and invested disproportionately in residential property. For many Baby Boomers, their lifetime savings are held in a single residential property.
We also know that overwhelmingly Australian retirees want to stay in their own home, which means they don’t want to sell or downsize.
The obvious solution is to release some of the funds sitting in the walls, making the home both the best place to live and the best way to fund their retirement. There is more than $1 trillion in untapped home equity owned by Australian retirees; around 80 per cent of retirees own their home with a median value over $700,000. Allowing them safe and easy-to-understand access to a small proportion of these funds can be life-changing.
A short history of the home equity market
In the early days, the market was poorly regulated and failed to serve the best interests of retirees. From the UK to the US, products often known as reverse mortgages in some cases led to elderly people in debt stress and in the worst cases, even homeless.
In Australia, this was quickly addressed and the world’s strongest regulations were introduced. In 2012, provision of reverse mortgages was comprehensively reviewed, significant legislation enacted and ASIC oversight strengthened. The Australian National Consumer Credit Act (2012) stipulates clear consumer protections at the beginning and end of all loans, including safe loan-to-value ratios (LVR), no negative equity guarantees, certainty of occupancy, responsible lending, and consumer disclosures. In 2018 ASIC completed a thorough review and endorsed the regulations as functioning well without breach.
Several of the major financial institutions including CBA, Bankwest, Westpac, St.George, Bank of Melbourne and Macquarie Bank offered fairly simple reverse mortgage products. However, as part of a broader retreat from the fringes of wealth where they had failed to scale, the institutions chose to exit the market, leaving the national need and, in some cases, their existing customers underserved.
The Australian market, alone, now includes over 5 million potential customers whose lives could be changed.
Looking to the future
This year the government strongly endorsed and encouraged the use of home equity to fund retirement.
Speaking at Household Capital’s Three Pillars Forum, senator Anne Ruston said: “Your home is more than just simply a place to live. It’s a store of value that can be released to boost retirement living standards. Home ownership has always been the bedrock of our society. We know that most Australians want to stay in their own homes during retirement, a place often with decades of memories. We want to give older Australians the confidence to tap into a small portion of their home equity to increase their retirement outcomes.”
The government took action in December 2021, thoroughly revamping the Centrelink Home Equity Access Scheme (formerly known as the Pension Loans Scheme), which – while it is significantly different from a Household Capital loan in terms of flexibility, service, loan amount and regulation – is a complementary product and increases the number of retirees who can be served.
Looking overseas, the retirement home equity market is already a proven entity showing rapid innovation and growth, and we expect the local market to strongly follow suit.
The UK has over 200 home equity access products and delivers more than £4 billion per annum ($7.5 billion), while the Canadian market delivers over CA$1 billion ($1.09 billion).
In Australia, we expect both consumer need and awareness to drive the rapid growth of this market in 2022. Our in-house data shows customers are borrowing to:
- Top-up (capital transfer to invested assets or regular drawdown)
- Refinance (of an existing mortgage or debt)
- Live (renovations, travel, transport)
- Give (Bank of Mum and Dad providing intergenerational funding for home deposits, mortgage costs and education)
- Care (medical expenses, in-home care and residential aged care)
In 2022, together with the government’s offer and other private lenders, we look forward to serving many more retirees and ensuring that they have access to their own home equity wealth to enjoy the retirement lifestyle that they deserve.
Dr Joshua Funder is chief executive and managing director of Household Capital. Josh is an advocate for positive ageing and co-founder and former chairman of Per Capita.