Tapping into home equity is a useful way to bridge gaps in retirement funding, according to former Industry Fund Services chair Garry Weaven.
Alongside former superannuation minister Nick Sherry and JPMorgan Australia vice chairman Jim Miller, Mr Weaven has thrown his weight behind Household Capital, a retirement funding provider that specialises in the release of home equity.
Household Capital offers a range of products aimed at helping retirees tap into the savings trapped within their homes, including reverse mortgages.
As with any loan, lenders charge interest on a reverse mortgage and Household Capital offers the lowest rate on the private market (5.15 per cent).
But borrowers don’t need to make repayments while they live in the home, and the loan is often repaid from the estate of the last remaining borrower.
Customers can take their equity as a lump sum, regular income stream, cash reserve, or as a combination of all three.
Mr Weaven, who joined Household Capital’s advisory board months after its market launch in 2019, said the company’s products were ideal for Australians who started working before the introduction of compulsory superannuation in 1992.
He told The New Daily a significant chunk of this cohort did not have enough money in their super to fund a “really decent” retirement, but often owned their homes outright.
“As an asset, they can make that work a bit better,” he said, noting that Household Capital estimates that Australians have access to roughly $1 trillion in untapped home equity.
Mr Weaven said home equity release could also help retirees diversify their investment portfolios, by allowing them to reduce their exposure to residential real estate and invest in other asset classes.
“But a lot of people will simply want access just to give themselves a better retirement – to do that once-in-a-lifetime trip in many cases, and good luck to them,” he said.
“That’s what savings are about. It’s so they can use them. It’s not mainly about inheritance, I wouldn’t have thought. So, it’s a useful product.”
But lenders have their work cut out in educating customers about reverse mortgages after the banking royal commission.
Stories later emerged of elderly customers falling into unsustainable debt spirals – taking on loans they had no chance of repaying and borrowing even more to cover their mounting debts.
As a result, some banks have withdrawn from the market, and many Australians worry they will lose their homes and have nothing to pass on to their children if they take on a reverse mortgage.
But Household Capital CEO and founder Josh Funder said such fears were misplaced, as regulations are strong and scrutiny heightened after the royal commission.
He said legal protections introduced in 2012 stipulate that borrowers can never owe more than the value of their home and can never be evicted, as there’s no obligation to make ongoing repayments.
“Guaranteed occupancy and [no] negative equity are fundamental protections – and they are very poorly understood,” Mr Funder told The New Daily.
“When people talk about reverse mortgages, they very much worry about recourse, about eviction, about losing home equity. And that is no longer the case and hasn’t been for about a decade.”
Another fear with reverse mortgages is that borrowers will disinherit their children by running down all their equity.
But Mr Funder said this was less of an issue today, as Australians were living for longer.
He said although releasing equity leaves older Australians with less money to pass on when they die, most children today will not receive an inheritance until their late 50s or 60s, unless their parents choose a different path.
Tapping into home equity allows parents to choose the timing of their bequest rather than waiting until death, he said. And this means they can help their children when they need it most – by using the equity in their homes to help children put down a house deposit, for example.
Mr Funder said acting as Bank of Mum and Dad was one of five key purposes of reverse mortgages, with the others being: Topping up retirement funding, refinancing home loans, renovating homes to make them age-appropriate, and financing the costs of ageing in place.
“The big thing is our customers are doing multiple of those … and using their home equity to fund their specific needs at their stage in retirement,” he said.
“And all of those needs help you live throughout retirement.
“It’s very different from the prior approach, where people would spend the money in the first year or two and have nothing to show for it, but a debt forever.”
The federal government provides competition for the market in the form of the Pension Loan Scheme (PLS), which is available to people who are eligible for the age pension and own real estate in Australia.
Borrowers can draw a combined fortnightly income from their pension and loan of up to 1.5 times the maximum pension rate for which they qualify. (See example here.)
The scheme is low risk and charges an interest rate of 4.5 per cent, down from 5.25 per cent in 2019.
But unlike commercial reverse mortgages, the scheme does not permit lump sums and only allows borrowers to draw down a fortnightly income.
Borrowers have also complained of wait times of up to nine months, and Mr Funder said the PLS is “not originated under ASIC responsible lending, requires annual valuation, ceases when your home equity drops and does not come with personal, ongoing service”.
“The PLS is a mortgage against your home held by Centrelink, which has had recent issues in enforcing robodebt,” he said.
Council on the Ageing chief executive Ian Yates said the PLS was very conservative and would never go bust, as it was run by the federal government.
But he said commercial lenders provided greater flexibility.
Either way, he said, retirees should seek personalised financial advice before taking out a loan.
The New Daily is owned by Industry Super Holdings
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