Reverse mortgages have grown to their highest levels since 2007, as ‘asset rich’ but ‘cash poor’ seniors look to their family home to finance their retirement, research by Deloitte shows.
Yet, despite the growing popularity of reverse mortgages, industry insiders warn seniors to be wary of the dangers of borrowing against their homes, which for the majority of Australians, is their most valuable asset.
According to a Deloitte report that was commissioned by the Senior Australians Equity Release Association (SEQUAL), there are more than 42,000 reverse mortgages, also called ‘equity release loans’, in Australia.
In the past 12 months the number of reverse mortgages, which allow seniors to convert the equity in their home into cash, has jumped by 10 percent, and over the last 24 months they are up by 22.5 percent, according to Deloitte.
“With Australia’s ageing population increasing, we are seeing a growing need for equity release services in the market,” said John Thomas, chairman of SEQUAL.
In addition, the study also found the majority of reverse mortgage customers were couples between 70-75 years of age. “These older retirees are releasing the funds to undertake financial projects such as home improvements, repay debts or to support their retirement,” he said.
“For retirees who’ve seen the value of their super slide, reverse mortgages can provide extra funds without the need to sell the family home.”
However, Thomas insists that reverse mortgages are complex and can expose older Australians to high levels of risk unless approached with extreme caution.
Paul Clitheroe, chairman of the Australian Government Financial Literacy Board, agrees that there is a dark side to reverse mortgages.
“Senior Australians need to think about the effect of accumulating interest relative to the growth in their property’s value,” he said.
Research shows that, on average, the interest rate on a reverse mortgage sits around 2 percent higher than a standard variable mortgage rate, which can have significant financial ramifications long term.
According to the government’s Moneysmart website borrowing $50,000 at the age of 60 can blow out to a debt of $232,000 in 15 years through compound interest – and more sobering it could be as much as $1.04m by the time you hit 90 years.
For this reason, Clitheroe urges retirees to seek independent legal advice before signing on the dotted line.
“One feature to regard as a must-have is a ‘no negative equity guarantee’,” he said. “This ensures the outstanding debt will never exceed the value of the property.”