With the recent publication of comments by the governor of the RBA, Glenn Stevens, it now seems highly likely that interest rates will be cut in September by at least 0.25%. Some have speculated that it could be as high as 0.50%, and that we may see rates fall by 2% over the next 12 months or so as the economy slows.

If this is the case, then reverse mortgages are suddenly looking a lot more attractive for many people. Now may be a good time to get an expert assessment on your borrowing capacity, and the total costs involved, in preparation for releasing equity from your home.  

Over Fifty Group last week announced it’s exit from the Australian reverse mortgage industry, effective immediately.

Although the credit crunch and the subsequent rising cost of funds was partly to blame,  their exit is probably mostly a function of mixed sentiment between previous management and shareholders over the long-term direction of the company. They have cited the capital intensive nature of reverse mortgages as a major deterrent for further operation, and will now focus on funds management and investment. They have no plans to re-enter the market in future.

Over Fifty Group had a good product offering, and their exit is regrettable for consumers and the industry alike. Given the (hopefully temporary) previous withdrawal of Bluestone and ASF, product choice has diminished significantly over the last 3 months. Now, perhaps more than ever, having a qualified reverse mortgage broker to guide you through the remaining lenders is crucial.  

This a question that an increasing number of people are beginning to ask themselves in the current economic climate. With the cost of living continuing to rise, and the prospect of any rise in the government aged pension looking very unlikely, more and more people are seriously considering equity release and reverse mortgage finance.

If you own your own home, and are over 55 years of age you may qualify. However, it will also depend on where your house is located and how much it is worth.  You can take funds as a lump sum, monthly instalment or line of credit and in many cases the loan can be structured so that it does not affect your pension.

There are a couple of simple things you can do to ensure that your reverse mortgage loan is working for you as efficiently as possible:

• Draw the funds out slowly, or gradually over time. This will reduce the ultimate interest bill. With some lenders you can do this via monthly instalments paid directly into your bank account
• Make payments to reduce the loan balance or interest bill, if you can afford it
• Make sure you have enough ‘cash reserve’ available for future use. If you have not established sufficient cash reserve (undrawn funds) at the outset, you may have to pay ‘top-up fees’ to the bank if you run out of money and need to go back for more. Why pay more bank fees than you need to?
• Avoid lenders with regular, or monthly fees

To check your reverse mortgage go here.

In Australia, as long as you own your own home you can get a reverse mortgage from as young as 55, however at that age you would be restricted to just 10% of the home value. As you grow older each year, you can get usually get a an extra 1% of the home value (depending on the lender).

For instance,  if you are 70 years old you would be eligible for 25% of the home value. For further assistance on whether you qualify and how much you could get, go here. 

Yesterday the Reserve Bank decided to keep interest rates on hold yet again. Whilst this is good news, there is a growing school of thought that rates may come down later this year as the economy begins to slow considerably.

This would provide relief for many households, and would also make reverse mortgages more attractive to many senior Australians who are currently refraining from releasing equity until interest rates go down.  

A new report has found that Australians now have the second longest average life span in the world - only the Japanese live longer. Today’s average life span of an Australian at birth is about 81 years — some 25 years longer than a century ago — and rising.

While this is obviously good news, it poses a serious financial challenge to the immediate future generations of senior Australians who are not prepared for such an extended period of retirement. How will they fund a decent lifestyle for so long?

There is an excellent article in The Australian today that summarises the problem and offers potential solutions.  The author, Dr Don Stammer, correctly identifies reverse mortgages as a good solution in many cases, if done correctly. Dr Stammer advocates - as does Seniors First -  taking reverse mortgage funds as gradually as possible to better preserve equity for children and beneficiaries.

Kevin Conlon was today appointed as the first Chief Executive Officer of the Senior Australians Equity Release Association of Lenders (SEQUAL), the peak Reverse Mortgage Industry Association.

“Kevin Conlon’s strong background in emerging markets and international banking makes him ideally qualified to take on the inaugural CEO role and guide SEQUAL through the next stage of its development,’ said Kieren Dell, SEQUAL Executive Director.

“The SEQUAL Board determined that SEQUAL had developed to a point where a full-time CEO was needed, and decided that Conlon was the outstanding candidate for the role.”

Prior to joining SEQUAL a year ago to drive the crucial SEQUAL education program as Head of Education, Conlon was the Head of Education for the Mortgage and Finance Association of Australia (MFAA) where he designed and delivered highly successful education programs for Mortgage Brokers. He also has an impressive track record operating at senior levels across a number of financial market sectors  which has seen him lead some of Australia’s most significant corporate finance and capital market transactions.

“I am committed to the process of ensuring that consumers are well-placed to make informed decisions about their retirement funding options. I look forward to the opportunity of guiding the development of an efficient and ethical Reverse Mortgage market,” said Kevin Conlon, SEQUAL CEO.     

The NSW Department of Fair Trading consumer survey on reverse mortgages provides a mixed bag of news for the industry and consumers.

On the one hand, the results show there is a significant un-tapped market with 48% of respondents indicating they would take a reverse mortgage some time in the future. This will gladden the hearts of lenders and provides further evidence, if any were needed, that there is a clear long-term need for these loan products in Australia. However the low existing take-up rate (only 3% of respondents had previously had established a reverse mortgage), indicates that most people still do not comprehend how reverse mortgages can be used to improve quality of life in retirement. 

(These statistics are broadly similar to previously published industry data, and probably within the acceptable range of ‘margin for error’ given the size and methodology of the survey)    

In addition, the fact that 20% of respondents were still not aware of reverse mortgages- even after 5 years of active product marketing by the industry - is somewhat disappointing. On an individual level, the results indicate many people continue to needlessly struggle with money, simply because they are not aware that a reverse mortgage provides them with another financial option.

From an industry perspective, the survey shows that there is still more work to be done in raising public awareness of the concept (the breadth of understanding). However with an 80-90% public awareness of reverse mortgages already achieved , there is a real case for SEQUAL and the industry to focus now on the depth of public understanding and dispel many myths that still exist.   

The NSW Department of Fair Trading recently conducted an online consumer survey on reverse mortgages that provides an intriguing insight into the public understanding of these loans.  Here is a cross section of the best questions and how people answered: 

1) Are you aware of the availability of a credit product for retirees called a reverse mortgage?

Yes - 78% No - 22%

2) Have you ever taken out a reverse mortgage?

Yes - 3% No - 94% Other - 3%

3) Do you think that sometime in the future would you consider taking out a reverse mortgage?

Yes - 48% No - 50% Other - 2%

4) How did you hear about this product?

TV - 35%, Radio - 8%, Newspaper/Magazine - 30%, Website - 3%, Friend/Family - 10%, Mortgage Broker - 4%, Financial Adviser - 2%, Other - 8%

5) If you took out a reverse mortgage what would you use the money for? (Respondents were asked to select all that applied, hence percentages exceed 100%)

Living expenses - 42%, Holiday - 24%, Home repairs - 43%, Medical expenses - 33%, Car - 18%, Help family - 20%, Other - 5%.

Although the sample for this survey was small (only 300 took part), half were in the current eligible demographic for the reverse mortgages in that they were aged 55 years or older.