Equity release schemes such as a reverse mortgage have been around for years, but the baby boomer generation is creating unprecedented demand for a financial product that helps ensure a comfortable retirement.Renowned as being spenders rather than savers, the so-called boomers are proving to be only too happy to borrow against all or some of their home to finance their retirement lifestyle.
In its simplest form, a reverse mortgage is a loan that allows seniors — generally those aged 55 and above - to borrow against the equity in their home, thus providing additional funds to support themselves in retirement.
No repayments are required during the loan term. Instead, the debt and interest builds up over time and may be repaid by the beneficiaries of the estate when they sell the home.
Research group Datamonitors says most people take a lump sum of between $40,000 and $50,000 and splurge on a new car or holiday.
Others elect to take a few hundred dollars extra each week to support a more comfortable lifestyle.
Declining pensions
According to Jon King, the chief executive of the United Kingdom based Safe Housing & Income Plan (SHIP) group, the global phenomenon of increased demand for equity release schemes is driven by longevity and declining government pensions.
“As people are living longer they need to fund longer retirements. In many countries house prices are up strongly and the home makes up a major part of people’s retirement nest egg,” he says.
Business manager of Mariner Financial’s equity release product, Daniel Burke, attributes a changing attitude to inheritance as another reason behind the popularity of the product.
Where once it was a given that the next generation would inherit the family home, many of those probable beneficiaries would rather see these people enjoying life.
“A lot of the kids of baby boomers want their parents to have a retirement and to have a life. They recognize that their grandparents might not have enjoyed their retirement and don’t want the same of their own parents,” he says.
Kieren Dell, Executive Director, Senior Australians Equity Release Association of Lenders (SEQUAL), believes the key to the growth rate of loans is the baby boomers. .
“Whereas the frugals didn’t take the loan unless they really needed it, for the baby boomers it is not a last resort. Their attitude is: my house is part of my asset base for retirement, how do I access it?,” says Dell.
“The baby boomers, who are now moving into retirement, have a different attitude to their retirement and lifestyle to their parents. They are focused on enjoying their life after years of working and want to travel, renovate, buy a new car and live their life to the full. To maintain this lifestyle, they require more than is provided by the age pension, and more than their superannuation savings will fund,” says Dell.
How much a person can borrow depends largely on their age, the value of their home and how much equity they have in it.
Limits on loans
Most lenders limit the loan to valuation ratio (LVR) to around 15 percent for people aged 65, increasing the maximum LVR as the borrower’s age increases.
In some cases, up to 45 percent will be lent on the value of the property for those aged 80 and over. Others will only lend 25 percent regardless of the value of a property or age of a person.
Tighter lending controls follow some unfortunate practices in the United States and the UK in the 1980s which saw hundreds of retirees left without a home before their time was up, as greedy lenders sought to recover debts on loans which probably should never have been taken out in the first place.
A number of safeguards have now been introduced by most lenders — which are reinforced by the likes of SHIP and SEQUAL — which prevent home owners from ever owing more than the value of their home or being moved out of their home before they die or move out of choice.
In another move to remove other nasty surprises, some lenders offer a fixed interest rate option for customers who want to safeguard against any future interest rate increases.
Greg Tanzer, the executive director of consumer protection at the Australian Securities and Investments Commission, urges anyone considering a reverse mortgage to get independent financial advice. This advice will help decide whether the product is likely to be able to meet the applicant’s needs now and in the future. ASIC also recommends asking an independent solicitor to check the contract and explain the fine print; and for the applicants to discuss their intentions with their family.
To work out how much the debt may grow over time, it may be worth using one of the many calculators available. See: www.fido.gov.au and www.aarp.org/money/revmort/
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