One of the key findings made in the 648-page Retirement Income Review, which was released by Treasurer Josh Frydenberg on Friday (20 November), was that “a more optimal retirement income system would involve retirees more effectively drawing on all their assets, including the equity in their home, to fund their standard of living in retirement”.
The review – undertaken by an independent panel including Mike Callaghan, Carolyn Kay and Dr Deborah Ralston for the federal government – stated: “An area where there is insufficient attention is how the use of a retiree’s assets can significantly influence retirement outcomes.”
Following the major report, two reverse mortgage lenders have emphasised how these lending products can provide a “solution” to retirement income.
Heartland Seniors Finance response
The head of operations of Heartland Seniors Finance, Sharon Yardley, said: “By releasing equity from your home, a reverse mortgage could help fund the cost of retirement and facilitate ageing in place” (where a retiree can stay in their home rather than downsize/move to specialised care).
“Our goal is to allow seniors to live a more comfortable retirement, with independence and dignity, free from financial stress, and in their own homes,” she said.
Ms Yardley added that Heartland’s had commissioned research by the Royal Melbourne Institute of Technology (RMIT), also released on 20 November, which found that most Australians do want to remain in their home as long as possible, but don’t have the funds to do so.
RMIT’s research found that almost 90 per cent of senior Australians want to remain in their home for as long as they can – but limited superannuation and the rising cost of living is restricting the ability to fund ageing in place and provide for home renovations and a comfortable retirement.
The research found that 13 per cent of Australians already plan to sell the family home to fund their retirement, with a further 42 per cent undecided on what they will do.
According to the Financing Ageing in Place report, while 93 per cent of Australian home owners would prefer to remain in home ownership, 36 per cent of older home owners said they live in a home that may be unsuitable for ageing in place, without upgrades or renovations.
However, more than a quarter (around 29 per cent) of seniors said they would not be able to afford the changes required to make their home age-friendly.
Ms Yardley added that reverse mortgage customers “commonly use their reverse mortgages to pay for home improvements to ensure their home is fit for retirement, cover the cost of in-home care, day-to-day expenses, and to consolidate debt, removing the requirement of regular loan repayments.”
According to RMIT, to increase awareness of how home equity could be used to fund a higher standard living in retirement, the three pillars of the retirement income system (the age pension, compulsory superannuation and voluntary savings) could be expanded to include equity release options such as reverse mortgages.
Lead RMIT researcher on the project, Associate Professor Stuart Thomas, said: “Australia has a high rate of home ownership, and for many, superannuation and the age pension may not be enough to support them comfortably in late retirement.
“A better understanding of equity release and how it could be included in their retirement planning can lead to better quality of life for many retirees.”
Household Capital response
Similarly, reverse mortgage lender Household Capital welcomed the release of the Retirement Income Review.
Dr Joshua Funder, chief executive officer of Household Capital, said: “For most Baby Boomers, voluntary savings outside of superannuation means the equity in their home. Australian home owners entering retirement today only started to accrue 3 percent superannuation halfway through their working lives – it’s simply not enough to fund more than 25 years in retirement.
“Available home equity can double the amount of their superannuation and help fund their retirement. Accessing home equity can offer a responsible, long-term solution to allow current retirees to boost their retirement funding.”
Mr Funder continued: “Home ownership is an integral part of Australian wealth creation, and it should also be widely available for Australians to voluntarily draw on their wealth to fund their retirement…
“The key is to establish national awareness of the opportunity to make the family home both the best place to live and the right way to fund retirement,” he said.
The Household Capital CEO emphasised that the Retirement Income Review report identified the potential role that home equity could play in retirement income.
“This is a massive opportunity to improve retirement outcomes,” he said, noting that while Australian retirees collectively own over $1 trillion in home equity, there is “growing pressure on both the government and individuals to fund in-home care as well as aged care”.
Finance industry working on improved training in reverse mortgages
The lack of awareness surrounding reverse mortgages was also flagged in a review of the market conducted by ASIC in 2018.
The review found that reverse mortgages can help Australians achieve a better quality of life in retirement, but that consumers have limited understanding of the products and limited choice in providers.
The regulator also found that the risks were also not being adequately explained. Since then, the finance industry has been working on improving education and protections for older borrowers, including through the new Banking Code of Conduct.
Last week, the Finance Brokers Association of Australia (FBAA) also announced that it had established a course to ensure that finance and mortgage brokers are sufficiently educated on reverse mortgages and equity release products.
The Seniors Equity Release / Reverse Mortgage Course, an industry-wide online training course offered through the AAMC Training Group, will be mandatory for FBAA members involved with this product.
According to the FBAA, the decision to establish the course was prompted by the updates to the Banking Code of Practice by the Australian Banking Association, which was approved by the Australian Securities and Investments Commission.
FBAA managing director Peter White noted that the new code has increased its focus on vulnerable borrowers through financial abuse and, in particular, elder abuse, adding that training and education has become vital to the industry’s “integrity” in this area.
“The broking sector needs to lead the way in this product, which is only going to increase in exposure and demand as people live longer and our population ages,” Mr White said.
Annie Kane is the editor of The Adviser and Mortgage Business.
As well as writing about the Australian broking industry, the mortgage market, financial regulation, fintechs and the wider lending landscape – Annie is also the host of the Elite Broker and In Focus podcasts and The Adviser Live webcasts.