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P&I switch could worsen senior debt stress

P&I switch could worsen senior debt stress

There has been a significant increase in calls to debt assistance services by seniors this year, including those struggling with their mortgage repayments.

According to recent statistics from the National Debt Helpline, a free independent service launched in 2011 for Australians experiencing financial difficulty, the helpline received more than 120,000 calls from January to August this year, up from 115,000 calls during the same eight-month period in 2017 and the highest ever for this period historically.

A representative from the National Debt Helpline, operated by a network of community organisations across the nation including the Financial Rights Legal Centre in NSW, confirmed that the helpline has been particularly busy this year, with an increasing number of senior Australians reaching out for assistance.

The Salvation Army’s financial counselling service, Moneycare, also revealed seeing an 18 per cent increase in Australians requesting help, particularly those over the age of 55 and in “severe debt” (where the total sum of their loans are more than six times their annual disposable income).

Against the backdrop of an ongoing royal commission and increased scrutiny by regulatory bodies such as the Australian Prudential Regulation Authority, lenders in recent months started introducing limits on the proportion of new lending at very high debt-to-income (DTI) levels and policy limits on maximum DTI levels for individual borrowers.

The helpline representative also confirmed that mortgagors had started to express concern about being switched from interest-only (IO) to principal and interest (P&I) contracts, which the Reserve Bank of Australia (RBA) earlier this year warned could mean that IO borrowers are required to pay an extra 30 per cent to 40 per cent in annual mortgage repayments (or an additional “non-trivial” sum of $7,000 a year) upon contract expiry.

The central bank noted that the increase would make up 7 per cent, or $120 billion, of the total housing credit outstanding, and that 2020 is the year that most of the 200,000 at-risk IO loans will reset.

The National Debt Helpline had additionally found that some borrowers over the age of 50 had been successful in obtaining substantial 25- to 30-year home loans and now feel burdened. Examples of this were also heard during royal commission hearings.

A need for alternative solutions for seniors?

A review of the growing $2.5 billion reverse mortgage market by the Australian Securities and Investments Commission (ASIC) had found a number of benefits of this type of loan, which allows Australians over 65 years old to access finance using the equity in their homes while living in the property and not having to make repayments until the borrower sells the property or passes away.

Speaking with Mortgage Business, Andrew Ford, the CEO of reverse mortgage lender Heartland Seniors Finance (HSF), said that refinancing mortgages was rare during 2006 to 2008, when the company was writing “a lot of business”.

But within a span of half a year, the lender had noticed a 2 per cent increase in customers using their reverse mortgage for debt consolidation, from 42 per cent at the start of the 2018 to 44 per cent six months in.

“Now 44 per cent involves some debt consolidation and about a third involves refinancing an existing mortgage, often with a very modest balance,” Mr Ford said.

He said that the increasing number of seniors experiencing debt stress suggests a growing need for alternative financial solutions for retirees.

“Forty-four per cent of our customers in the 2018 financial year used their reverse mortgage for some form of debt consolidation and that has been a big increase from our historical numbers. It’s not necessarily a mortgage; it might just be a small credit card balance, a personal loan, a car loan. But given the stress that the customer feels around having that debt that they are struggling to pay, a reverse mortgage can be really transformational for the peace of mind that it provides,” Mr Ford said.

“The [amount of] feedback we get from our customers when our loan settles… they feel a great sense of peace of mind because we remove the burden of ongoing debt servicing obligations or concerns about how theyre going to stay in their house.”

However, Mr Ford previously lamented that there are significant misconceptions around reverse mortgages that need to addressed, the most prominent one being that borrowers could lose their homes, which he said has never happened with any HSF customer.

This is “actually inaccurate”, he said, further explaining that reverse mortgages have stronger consumer protections than standard home loans (under the National Consumer Credit Protection Act) that prohibit from such a scenario coming to fruition.

Heartland Seniors Finance’s market share has been increasing in recent years, standing at about 20 per cent as of 30 June 2018, and is expected to continue to grow as there are around 20,000 Australians turning 65 every month.

The lender’s portfolio of reverse mortgages in Australia grew by NZ$159.3 million (AU$144.5 million), or 31 per cent, to NZ$676.8 million (AU$613.8 million) in the 12 months to the end of June 2018. Mr Ford said that the majority of its business comes from the broker channel.

“Approximately 70 per cent of our business comes from brokers and weve worked really hard to expand that distribution… There are obviously demographic factors at play, [such as the] ageing population and a growth in need for reverse mortgages, but weve increased our distribution through the broker channel and are also attracting customers directly through online activities,” the HSF CEO said.

HSFs restructured parent company, Heartland Group Holdings, is scheduled to start trading on the Australian Securities Exchange on 1 November 2018, which Mr Ford said will help the reverse mortgage business accelerate growth at a time of experiencing strong momentum.

The lender previously explained that by sitting outside Heartland’s banking group, HSF will no longer be “constrained” by the capital requirements of the Reserve Bank of New Zealand, and that restructuring made more business sense than trying to find alternative sources of funding.

Updated on 17 October 2018 to reflect that the National Debt Helpline is operated by different organisations in different states. 

[Related: Heartland restructure to aid Australian business]

P&I switch could worsen senior debt stress
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