- Reverse mortgages are a relatively new means of financing retirement
- They are regulated by ASIC under a 2012 Act of Parliament
- Various financial instruments exist, including Homesafe's 'capped share'
More and more elderly people will live in their homes for longer.
This statement, in and of itself, is perhaps obvious, but it is a major trend that is playing itself out right now, and will continue to do so over the next few decades.
Currently, one in four Australians are over 55 years of age (6.5 million people). 490,000 of these are over 85.
The ageing population will ensure that millions of Australians aged 70, 80, 90 and older will continue to live in their own homes. The questions are: how will they be safe, and how can they afford this lifestyle?
The answer to the former may lie in certain technologies, and other assistance that can keep an ageing population safe and cared for in their own homes.
In answering the latter, this greatly depends on their own financial circumstances and various instruments at their disposal.
Reverse mortgages are a relatively new means of financing retirement. Since 2012, they were regulated under Responsible Lending Laws legislation, and by the Australian Securities and Investments Commission (ASIC).
A reverse mortgage is a loan, secured by property, that enables elderly owners to continue to live in their own home, while living off its equity. This assumes the property is not already high leveraged or encumbered.
Unlike regular mortgages, the lender does not make regular mortgage payments, but rather receives a lump sum amount, or a monthly payment, or a line credit, or some such combination.
As the monthly loan amounts add up, so the outstanding loan grows, which is then paid out of the sale of the property, should the occupants move, decide to sell or pass away. In Australia, the loan should not exceed 50% of the house value.
There are usually initial application fees to pay, as well as stamp duty, mortgage fees and other charges. Some have monthly fees, as well as interest.
Pros and Cons
Reverse mortgages have had their advocates as well as detractors.
Some argue that they benefit the elderly by ‘smoothing out’ their spending commitments, not overburdening them with debt, and allowing them to continue living in their own homes for longer.
Detractors argue that these products can be complex, with all kinds of fees and charges, which may not make great economic sense for the borrowers concerned. In some countries, they have attracted scam artists and other fraudulent schemes.
Hence, they are regulated.
Another version on the reverse mortgage is a product offered by Homesafe. Their product is technically not a loan. Rather, the elderly homeowner receives an upfront sum, in exchange for a ‘capped share’ of the future house price, when sold.
Homesafe Pty Ltd, the company behind the product, announced today that it is waiving its usual upfront fees to any customer who enquires before 30 June this year.
“A significant proportion of wealth for older homeowners has accumulated in the home they live in. It is not uncommon for retirees to draw on this asset to improve standards of living, to pay out a mortgage, or to provide an additional source of funds to support ageing at home.”
Dianne Shepherd, Homesafe COO
At the same time, a worrying trend is the increasing risk of ageing homelessness. Governments and societies will have to grapple with this over the coming years. In the 2011 census, one in seven homeless people were over 55. This proportion had increased 15% in one year.
No doubt, the area of seniors housing and elderly living is one that will continue to become more important, and complicated, in western countries.