No access to funds, older borrowers angry

A vast change to the reverse mortgage market is leaving a large pool of older borrowers without access to funds.

Seniors First managing director, Darren Moffatt, says that since the global financial crisis (GFC), reverse mortgage lender numbers have contracted drastically, down from 21 major lenders prior to the crisis, to four at present, including St. George, CBA and Bankwest.

A reverse mortgage is a form of equity release (or lifetime mortgage). It is a loan available to seniors and enables eligible homeowners to access a portion of their equity. The homeowners can draw the mortgage principal in a lump sum, by receiving monthly payments over a specified term or over their (joint) lifetimes, as a revolving line of credit, or some combination thereof.

The homeowners’ obligation to repay the loan is deferred until the owner (or survivor of two) dies, the home is sold, they cease to live in the property, or they breach the provisions of the mortgage (such as failure to maintain the property in good repair, pay property taxes, and keep the property insured against fire etc).

Mr Moffatt says while the previous minimum age for equity release was 55 years of age, it has now increased to about 65 years of age.

“The sector has really felt the brunt of the GFC; equity release requires capital to be tied up for a long time, so when capital became scarce, the sector was the first to feel the result of that,” Mr Moffatt says.

The result is that the expectations of many older borrowers for access to equity in their properties are often not being met.

“I have literally had quite a few potential borrowers on the phone, and when they have found out they can’t get money like they used to be able to – they can’t release equity – they are really angry,” he says.

The National Consumer Credit Protection (NCCP)  is only compounding the problem for 55 to 65-year-old borrowers.

“The NCCP is definitely causing lenders to be very, very careful or reluctant to lend to people in their late 50s to early 60s with forward mortgages. If they don’t have an exit strategy – for example a large super fund, or a second property – it can be difficult for these borrowers to get funds,” Mr Moffatt says.

He says says the significant change across the industry is affecting a huge amount of people who have “no idea that the change has occurred”.

Mr Moffatt argues the result is a “massive market opportunity” for banks and other lenders in the pre-retiree space, due to huge demand for access to existing equity as the community ages.