Analysis: the equity release dilemma

The Actuaries Institute has highlighted key issues with home equity release products in its second submission to the Murray Inquiry.

While a lack of funding is part of the supply-side problem, the institute noted issues with the demand for reverse mortgages, particularly arising from the exception of the family home for the age pension assets' test compared with the treatment of other assets, which it believes can be an impediment to retirees releasing housing wealth.

Reverse mortgage settlements have been in a state of decline for the past three years.

As at December 2013, there are only 41,435 reverse mortgages on issue in Australia with the total market size now $3.56 billion, according to Deloitte research.

This means only one to two per cent of retired households use a reverse mortgage.

Yet for most retirees, two-thirds of their household wealth will still be in the equity they have in their home, at least for the foreseeable decade, says Deloitte partner financial services James Hickey.

“For the average retired household, that is more than double the money they have in superannuation and other assets,” he says.

So why are reverse mortgages failing to attract retirees? Why aren’t more brokers writing them?

“Pre-GFC, 50 per cent of reverse mortgages had been written by mortgage brokers or financial planners,” Mr Hickey says.

“Since then, the majority of mortgages are being written via the direct branch distribution channel,” he says.

The non-bank lenders that were active in the market pre-GFC such as Bluestone and ABN Amro all extensively used mortgage brokers to distribute their product, while the banks that offer reverse mortgages still largely use their proprietary branch networks.

“Since the GFC, a lot of those non-bank lenders could not support new lending into the reverse mortgage market,” Mr Hickey says.

“The securitisation markets essentially froze for a period of time,” he says. “They were not actually able to get funds themselves to advance to borrowers.

“So therefore those non-bank lenders effectively exited the market, and that meant the banks were left remaining and the branch channels have become more dominant in recent years.”

With millions of Australians entering retirement and billions of dollars in home equity gong along with them, the financial services industry should be responding to the demographic shifts.

But according to former SEQUAL chief executive Kevin Conlon, senior Australians are being neglected.

“It would be a mistake for financial advisers to believe that retirees have ended their income generating years in that they are leaving employment, and to somehow see that as a withdrawal from the economic system,” Mr Conlon says. “That is totally wrong.”

Mr Conlon believes the driving force that brings equity release into play is that the overwhelming number of senior homeowners don’t wish to move away from their home.

“That is the key to it,” he says.

“If they were willing to move and downsize and move away from family and friends, equity release may not be the option for them.”

It’s safe to say that the majority of mortgage brokers don’t view reverse mortgages with much enthusiasm.

Financial advisers are also reluctant.

The need for equity release by senior Australians is a socio-economic one, while the need to manufacture and distribute equity release products comes down to funding and profitability.

Here we have our subjects crossed.

“If there must be a very clear business case for the profitability of these products,” says Mr Conlon, “then I would say that I don’t think it is appropriate to be awarding the distributors of these products, ie. the brokers and advisers, but rather the manufacturers of these products, and it is a case of where the shoe fits,” he says, adding that the current attempt by commercial banks to manufacture equity release products is “a bit of a lost cause”.

“This really is the call that Jeremy Cooper made all those years ago in the super review – that there are financial institutions better placed than commercial banks to manufacture these products.”

Like Cooper, Mr Conlon says it isn’t the banks that should be manufacturing equity release products, but the super funds.

“They are high yielding assets in that they either share in the upside of property value movements or capitalised interest, and they are very secure products in that they are secured by a first ranking mortgage over owner-occupied properties,” he says.

“So they are really good quality assets with the longevity that those institutions are looking for.”

In its annual Reverse Mortgage Report, Deloitte estimates more than $500 billion of home equity is held by Australians aged over 65 and is available to be leveraged.

“Banks, insurers and superannuation funds are best placed to better embrace, understand and educate Australians on the option of equity release products,” Mr Hickey says.

“These are the groups seeking to help their customers aged 65 and over to navigate their retirement with the dual challenges of longevity and income sustainability,” he says.

“Bringing what is often their most substantial asset – their home – into such discussions must be in the best interests of everyone.”

 

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