Get Ahead In Reverse

The Age

Monday August 17, 1998

MAUREEN MURRILL

THE US market is often the "test market" for what will roll off the production line in Australia, particularly when it comes to the financial services industry.

Take, for example, the cash management trust revolution, the huge array of managed investment funds and more recently the concept of mortgage originators. They are all taken for granted now and they are considered as Australian as meat pies and Holden cars. But they had their genesis in the US.

It's the same with reverse mortgages. These allow ageing home-owners to access equity in their home to improve their standard of living. Simply, a retiree can "borrow" from a financier, never pay the loan back but agree to let the lender settle up when they die or move out of the house. The big comfort for most retirees was that no matter whether the debt eventually amounted to more than the value of the home, they could continue to live in their home until they died.

For some reason, the concept of reverse mortgages, which has been a huge boon for the ageing population in the US, has not become a feature of retirement financial planning in Australia. It made a brief appearance in a couple of forms and, when a private lending organisation launched a product two years ago, was embraced with alacrity by the powerful retiree market. So much so that it was forced off the market because demand for funds was dramatically outstripped by supply.

On the other hand, the National Australia Bank says it has always had a watching brief on reverse mortgages but never thought the demand was very strong. However, the bank recently stepped up its research.

Peter Flavel, managing director of National Financial Management, says this is partly due to the bank's belief that while there is now a superannuation system in place to allow people to contribute to financing their own retirement, the major concern with the elderly is their ability to meet the growing cost of health care in their old age.

A refined reverse mortgage might be able to do this, provided retirees overcame their reluctance about leaving to their children a home that still had even a small mortgage. Commercially, Mr Flavel says, the product could be designed to benefit both retirees and the bank.

The big hurdle for the financiers is that retirees are living longer and longer, which means they have to wait an exceptionally long time to get their money back. And in the meantime, they have to carry the risk that in the end they will be compensated by an ever upward-moving real estate market.

For about three years until 1996, the Department of Social Security worked in conjunction with the Advance Bank (now St George) to offer a product called the Home Equity Conversion Loan. The arrangement was that home owners over the age of 68 could draw down agreed amounts each year against the value of their home. There were upper limits and, as a guide, they could draw $5000 a year if they were under the age of 75 and $7500 a year after that. The product was withdrawn from the market in June 1996 without any real explanation.

However, Advance ran its own retiree draw-down facility and, while it did not mirror the DSS-sponsored product, it was called Money for Living. To qualify, a borrower had to be over 68 and own a home (even one that was still mortgaged). Under the arrangement, they could borrow up to 20 per cent of the value of the home, up to a limit of $100,000.

The bank insisted the money be taken in one lump sum and offered the borrower the option of paying back nothing at all, leaving the estate to finalise the agreement when they died, or to pay out the mortgage in the strictly normal sense of the word. The carrot again was the fact that no matter how long they lived and no matter how large the "mortgage" became, the house was there for them to live in.

Advance, which has been taken over by St George, still offers the Money for Living product. But unlike the bank's other mortgage products, it isn't pushed by a marketing campaign. The reason undoubtedly is that each time the bank enters into a contract for this product, it is taking a risk that it will have to wait a long time for its money.

The bank is also captive to the fickle property market and to the vagaries of inflation, and it can't force people to make early repayments or call in the loan.

These are all sentiments expressed by other major banks, which have investigated the system over a period of years but made a commercial decision to stay out of the market.

The innovative La Trobe Home Loans group, based in Traralgon, a couple of years ago had an extensive pool of funds that it allocated to reverse mortgages. The offer had to close, almost as soon as the concept got out into the market, as the demand completely outstripped supply.

And despite its popularity with the retiree market, it has been difficult to again generate a constant supply of funds from financiers who obviously find risks in more traditional markets more attractive.

© 1998 The Age

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