The value of Australia's reverse mortgage settlements grew almost two thirds last year as retirees tapped home equity to supplement income, a new study shows.
Settlements of new loans grew to $520 million as of December 31 compared with $315 million a year earlier, according to a reverse mortgage study co-authored by actuarial and consulting firm Trowbridge Deloitte.
Some 27,500 reverse mortgages, where lenders make advance payments to owners against the value of a property, were made last year in a market now worth some $1.5 billion, according to the study.
The results highlight how a growing number of product providers and distribution channels has helped the loans gain wider acceptance, said James Hickey, a partner at Trowbridge Deloitte.
"This growth coincides with an increase in the number of product providers, providing improved product flexibility and wider distribution channels," he said.
The study showed use of mortgage brokers to secure the loans is growing.
While 72 per cent of all outstanding loans sales were still direct with the lender, some 46 per cent of loans made in 2006 were through brokers.
That's up from 38 per cent a year earlier.
The average age of borrowers was steady at 74, while the average age of new borrowers last year was 72, the study showed.
Lump sum advances made up 80 per cent of loans with regular draw downs accounting for the remainder.
That shows many home owners are using reverse mortgages to supplement pensions, said Kieren Dell, executive director of Senior Australian Equity Release Association of Lenders (SEQUAL) which co-sponsored the study.
"An increasing number of Australian retirees are recognising the benefits of reverse mortgages," Mr Dell said.
"The increasing use of regular draw downs indicates that these seniors are using the funds more and more to supplement their pensions rather than using their equity for one-off spending."
Saturday, May 19, 2007
Monday, May 7, 2007
What is an offset mortgage?
Mortgage life insurance is voluntarily. It is the decision of the borrower to sign up for the mortgage life insurance. In order to see the need, the borrower must sit with a certified insurance agent. The insurance agent will analyze the overall financial picture of the borrower.
Depending on the insurance policy, the insurance company pays for the entire mortgage or maximum amount. For example, the insurance company pays up to maximum of $600,000. If the mortgage went over the maximum amount, the insurance company repays the portion of the mortgage up to the maximum amount.
The insurance policy starts at the same day of the approval on mortgage. Even though the borrower has not paid the first mortgage payment, the borrower still gets the benefit.
Since the borrower receives no the interest on savings account, the borrower do not pay the tax on interest on savings account. Naturally, the interest on savings account will be use to pay off the mortgage interest. In United Kingdom, many borrowers are on a high tax bracket. The borrower often sees the forty percent of the interest goes to tax.
Using the interest on savings account, the borrower uses pay off the mortgage interest. In other words, the interest on savings account cancels out the mortgage interest that the borrower pays on a conventional mortgage.
The borrower usually purchases home thru mortgage. It takes a huge amount income to pay off the mortgage. In case of critical illness, debilitating accident, or depressing death of the borrower, the family needs to replace the loss of income to pay off the mortgage. With mortgage life insurance, the family does not need to worry about repaying the mortgage.
Mortgage life insurance differs from private mortgage insurance also known as PMI. The PMI protects the mortgage lenders in case of default of mortgage payment. The mortgage lenders risk the inability to re-sell the property high enough to pay off the mortgage. When the borrower lacks enough money for twenty percent down payment, the mortgage lenders requires PMI. As soon as borrower pays off or the home equity reaches twenty percent, the mortgage lenders automatically cancel the PMI premiums.
The offset mortgage originally started from Australia. Later, the offset mortgage rises in popularity in the United Kingdom. Before, the mortgage lenders only target the wealthy. Now, the mortgage lenders are widening the market for this type of mortgage.
In many times, the borrower pays a loan to value ratio of ninety five percent. That means the borrower pays five percent as down payment. Due to competition, many mortgage lenders may offer as low as loan to value ratio of eighty percent.
Author: Dennis Estrada
Mortgage Life Insurance
The offset mortgage is a type of mortgage in which the borrower can use their savings account to offset the mortgage interest. The mortgage interests are substantial amount especially at the start of the mortgage.
Mortgage life insurance is voluntarily. It is the decision of the borrower to sign up for the mortgage life insurance. In order to see the need, the borrower must sit with a certified insurance agent. The insurance agent will analyze the overall financial picture of the borrower.
Depending on the insurance policy, the insurance company pays for the entire mortgage or maximum amount. For example, the insurance company pays up to maximum of $600,000. If the mortgage went over the maximum amount, the insurance company repays the portion of the mortgage up to the maximum amount.
The insurance policy starts at the same day of the approval on mortgage. Even though the borrower has not paid the first mortgage payment, the borrower still gets the benefit.
Since the borrower receives no the interest on savings account, the borrower do not pay the tax on interest on savings account. Naturally, the interest on savings account will be use to pay off the mortgage interest. In United Kingdom, many borrowers are on a high tax bracket. The borrower often sees the forty percent of the interest goes to tax.
Using the interest on savings account, the borrower uses pay off the mortgage interest. In other words, the interest on savings account cancels out the mortgage interest that the borrower pays on a conventional mortgage.
The borrower usually purchases home thru mortgage. It takes a huge amount income to pay off the mortgage. In case of critical illness, debilitating accident, or depressing death of the borrower, the family needs to replace the loss of income to pay off the mortgage. With mortgage life insurance, the family does not need to worry about repaying the mortgage.
Mortgage life insurance differs from private mortgage insurance also known as PMI. The PMI protects the mortgage lenders in case of default of mortgage payment. The mortgage lenders risk the inability to re-sell the property high enough to pay off the mortgage. When the borrower lacks enough money for twenty percent down payment, the mortgage lenders requires PMI. As soon as borrower pays off or the home equity reaches twenty percent, the mortgage lenders automatically cancel the PMI premiums.
The offset mortgage originally started from Australia. Later, the offset mortgage rises in popularity in the United Kingdom. Before, the mortgage lenders only target the wealthy. Now, the mortgage lenders are widening the market for this type of mortgage.
In many times, the borrower pays a loan to value ratio of ninety five percent. That means the borrower pays five percent as down payment. Due to competition, many mortgage lenders may offer as low as loan to value ratio of eighty percent.
The interest on savings account is big enough that many mortgage lenders may offer to repay any amount without mortgage penalty. In a conventional mortgage, the borrower pays mortgage penalties on any repayment over the maximum limit to repay the mortgage early.
Usually, the mortgage lenders link the mortgage and savings account into a single account. Therefore, the borrower sees only one balance. This is more commonly known as Common Account Mortgage (CAM). For example, the borrower takes $300,000 mortgage. The borrower uses the savings account that is worth $100,000 to offset the mortgage interest. In return, the borrower only pays interest on $200,000.
Author: Dennis Estrada
Saturday, May 5, 2007
Fancy an interest-free loan to buy a house? (Australia)
author: unknown
Hearing the word 'mortgage' always makes me wince. Words like oppression, fear and 'will-I-be-dead-before-it's-paid-off?' come to mind. I can smell my mortgage broker's polyester shirt and hear the life-threatening sound of the pen signing away my life's earnings.
But when I heard about 'shared-equity mortgage', no such fears invaded my senses. All I could think was, 'that's interesting', 'good idea' and 'can't-wait-to-see-if-and-when-it-will-ever-happen'.
The day is nearing for the Australian launch of shared-equity mortgages -- a new financing arrangement allowing people to borrow 20% of the value of a house, interest-free.
So what's the catch?
You have to pay 40% of the capital gain on the house back to the lender when you eventually sell the property.
Some people might not find this such an enticing idea, but these shared-equity mortgages will be available through an Adelaide bank and mortgage brokers when launched in the next few weeks.
You can read more about these shared equity mortgages in this wonderful story by Simon Hoyle or this one by The Australian's Anna Fenech. If you want a basic explanation of them, check out this slide show I made (you'll have to be a quick reader because my mastery of technology didn't allow me to make this slideshow work terribly well -- thank God for the stop button).
The finer details have yet to be announced -- but Rismark founder Christopher Joye has confirmed the shared-equity mortgage product (also called an EFM) will launch soon.
The shared-equity mortgage works as a second-mortgage, as most people will still need a traditional mortgage to purchase the remaining 80% of the property. Alternatively, this type of mortgage might appeal to income-poor, asset-rich retirees who don't want to risk using a reverse-mortgage.
Apparently there will be no penalty on the borrower if property prices actually fall -- they will simply repay the interest-free loan. There will also be a renovation provision, to allow property owners to renovate their property and recoup the "capital improvement cost" later on.
After I accidentally entertained a press conference by phoning in to what I thought was a private line and admitting I work from my spare bedroom in my pyjamas, Rismark and RP Data announced the launch of new property price indices and a residential property derivatives trading market.
Before your eyes glaze over at this financial news, this launch is the first stage of Rismark's planned roll-out of a range of innovative residential property products. These new products could eventually change the way we buy residential property, offering things like Home Value Protection Insurance to allow homebuyers to insure against the risk of falling property prices.
Property analyst Michael Matusik says he applauds such ideas as one way to break the deadlock of the affordability crisis. "Affordability won't improve overnight, but the idea is the tip of the iceberg as one way to make owning property more possible for people," he says.
So what do you think? Would you be interested in a shared-equity mortgage? Will they work to give more people a leg-up into the property market?
Equity lenders prepare to take on reverse mortgages
Wednesday, 14 Mar 2007 11:25AM
Shared equity lenders are preparing for a turf war with reverse mortgage lenders for the retiree equity release market. The first non-government shared equity loan, Rismark's equity finance mortgage, is being marketed at this stage to first home buyers and families that want to trade up, but it will not be long before the product is being offered to retirees.
Rismark International managing director Christopher Joye said the package being offered by Adelaide Bank was not targeted at retirees but future product releases would be.
"We think shared equity will compete very strongly with reverse mortgages," Joye said.
"It is a more flexible product. There are no age-based limits. And we would argue the risk to the borrower is much lower.
"A retiree could use either product to release equity from their home. The risk they run with a reverse mortgage is that they end up with no residual equity in their home. With our product the borrower will never owe more than 40 per cent of the value of the property. Retirees are risk averse. Why would they take the risk of being left with nothing if they had an alternative?"
Greenway Capital, a start-up equity mortgage specialist that plans to launch an equity mortgage by mid year, has said that it will target the baby boomer and retiree market.
Greenway chief executive Peter Martin said yesterday that his group's product would be a "pure" equity mortgage (not linked to a conventional mortgage) that would offer up to half of the value of the home.
Martin said Greenway would market to home buyers but also to home owners who want to access equity in their home.
At stake is a market that is small but growing very fast. According to a report released last October by consulting group Trowbridge Deloitte, loan balances grew from $459 million in December 2004 to $848 million a year later, an increase of 85 per cent. At June 2006 balances stood at $1.1 billion.
The number of accounts increased from 9700 in 2004 to 16,600 a year later, an increase of 71 per cent. At June 30 the number of accounts stood at 20,300. Trowbridge Deloitte said the average borrower is 74 years old and borrows an average of $53,500.
Financial Coach: Reverse Mortgages Offer Seniors Relief from High Interest Mortgages
CLEVELAND, March 14 /PRNewswire/ -- As national attention becomesSOURCE True Wealth Design, Inc.
increasingly focused on the crisis in the housing market, a financial coach
and registered investment advisor believes reverse mortgages may be the
answer for some cash-strapped senior citizens trapped in high interest
mortgages.
"Many seniors are fearful of reverse mortgages because they simply
don't understand them and how they can benefit from them," said Kevin
Kroskey, owner of True Wealth Design, Inc. of Greater Cleveland. His firm
specializes in providing sound advice on home-equity management. Kroskey
said too many seniors have high-interest mortgage loans when they could be
reaping some of the benefits of government guaranteed reverse mortgages.
Kroskey recalled a recent situation involving an elderly couple who lost
their home. "During the bankruptcy proceedings, the couple could have kept
their home if they utilized the option of a government guaranteed reverse
mortgage," Kroskey said.
While reverse mortgages are beneficial for seniors with rising mortgage
payments, they can also benefit seniors who have no mortgage payments. The
benefits include guaranteed income growth, ready access to money, and a
hedge against inflation, Kroskey said.
He provided this example: A senior couple with a home valued at
$150,000, of which the mortgage has been paid, could obtain a reverse
mortgage credit line of $69,580. Assuming the line is simply established
and no withdrawals are taken, this credit line is guaranteed to grow at a
rate currently above 7% (7.28% as of 3/7/07) and changes monthly. In 20
years, if no withdrawals are taken and assuming the same initial growth
rate each year, the credit line will be worth $283,825. Meanwhile, if their
$150,000 home appreciates at an average rate of 3%, in 20 years their home
would be worth $270,917 or almost $13,000 less than the credit line's
worth!
In the same example, Kroskey said if the couple does not get a reverse
mortgage, they may end up depleting their savings and investments, if
emergency circumstances require the need for quick cash to pay for things
like home health care, assisted living or nursing home care.
A reverse mortgage may not be everyone. Kroskey, however, urges all
seniors 62 and older to learn more by visiting AARP's website-
http://www.aarp.org/money/revmort.
FOR MORE INFORMATION CONTACT:
Kevin Kroskey, MBA at 216-373-7670
Fixed rates return to reverse mortgages
Published Wed, 14 Mar 2007 12:00:00 GMT
Lenders aim to attract borrowers with lower costsTom Kelly
Inman News
Many older homeowners prefer reliable, dependable mortgage interest rates. It helps them plan their monthly financial calendars, especially when they are battling the challenges of paying for health care on fixed incomes.
Fixed-rate mortgages have been absent from the reverse-mortgage scene for more than decade, as lenders relied primarily on adjustable-rate mortgages insured by the U.S. Department of Housing and Urban Development. These mortgages, known as Home Equity Conversion Mortgages (HECMs), account for nearly 85 percent of the reverse market.
BNY Mortgage, which recently announced it would trim the interest rate charged on the adjustable-rate HECM, introduced two fixed-rate reverse-mortgage products on March 5.
The first, called the New Generation HECM, is similar to the current FHA/VA rate and hovers near 6.5 percent, not including the mandatory mortgage insurance premium. The interest rate is tied to the one-year CMY, or constant maturity treasury index. The second product, the Fixed Prime Advantage, is a "jumbo" product for loans greater than $405,000. The rate, which will be set at closing, is the prime lending rate plus .99 percent. That rate recently was a tick over 9 percent.
"By offering more options to seniors, we feel strongly that we are making reverse mortgages more accessible for today's senior homeowners," said Sarah Hulbert, executive director for BNY Mortgage's western regional center. "Seniors who previously were put off by the adjustable-rate options will now have fixed-rate options, and seniors who previously did not qualify for a reverse mortgage due to insufficient loan proceeds will now be eligible."
Reverse mortgages allow senior homeowners, with a minimum age of 62, to receive proceeds from a lender -- either in a lump sum, regular monthly payments, a line of credit or in a combination of those options. When the house is sold, or the last remaining borrower dies or moves out of the home, the loan amount plus the accrued interest is repaid. The borrower can't owe more than the value of the home. The HECM program has insured more than 240,000 reverse mortgages since 1990, while private "jumbo" reverse plans also have been available.
Wells Fargo Home Mortgage, the nation's leading retail originator of reverse mortgages, announced it also has trimmed the margin it charges on the HECM adjustable by 50 basis points. Seniors who have already applied for a reverse mortgage with Wells Fargo will be offered the lower margin.
"Reverse mortgages are about making the most of the equity that seniors have built into their homes," said Jeff Taylor, vice president of Wells Fargo's Senior Products Group. "By lowering the margin, we are lowering the interest rate charged on a reverse mortgage. This means more seniors will be able to use the reverse-mortgage program, giving them the ability to turn their home equity into additional retirement funds."
Providential Home Income Plan Inc., a venture capital-funded company whose sole purpose was to originate and service reverse-mortgage loans, offered a fixed-rate reverse mortgage in the early 1990s. While the company was one of the first to begin offering a program to enable seniors to tap the equity in their homes, some of loans contained the controversial "equity share" component, giving the lender a significant portion of the appreciation in the home. Often, that portion was 50 percent of a rapidly appreciating home, leaving some homeowners in debt when the senior died or moved out of the home. The "equity share" component no longer is included in reverse mortgages and is a key reason for the popularity of today's products.
In 1996, Transamerica HomeFirst purchased the reverse-mortgage servicing assets of Providential. Three years later, Financial Freedom, the Irvine, Calif.-based company specializing in jumbo reverse mortgages, purchased Transamerica HomeFirst.
Dr. Barbara Stucki, a Bend, Ore., researcher and consultant, completed a study for the National Council on the Aging that supports tapping into home equity via a reverse mortgage as the critical financing vehicle to help seniors afford long-term care services at home.
"There is simply no other pot of funds sitting around that is going to solve the long-term care situation in this country other than home equity," Stucki said. "I just don't see any other way -- unless people simply want to dig deep down and pay out of their pockets. The idea is to use your home to stay at home."
Tom Kelly's book "Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border" was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on amazon.com and on tomkelly.com. Tom can be reached at news@tomkelly.com.
Next year Italy – a reverse mortgage success
By Robin Bowerman
Wednesday, April 04, 2007 at 03:29pmA 70-year-old Queenslander is a “success story in the reverse mortgage stakes”, according to the March issue of Choice magazine, published by the Australian Consumers’ Association.
A Choice consumer report – Pawning your home? – includes the tale of how the Queensland pensioner’s life has gained an exciting new dimension by his extremely careful selection of a reverse mortgage and the use of the borrowed money to travel and for emergencies.
His most important decision was to select a reverse mortgage with a non-equity guarantee. This means the lender will cover any shortfall between the value of his home and its eventual sale.
Also significant is the fact that this homeowner is single. “I have only one nephew,” he says, “so I didn’t have any children to think of down the track. What I love best is the travelling. I’ve just come back from three weeks in India and will go to Italy next year.”
While acknowledging that this pensioner has managed to make the most of a reverse mortgage, Choice raises concerns about the contracts for many reverse mortgage products. (The magazine also examined reverse mortgages in last month’s issue.)
Reverse mortgages enable homeowners, generally over 60, to borrow against the value of their homes to receive an income stream or lump sum. The debt is generally not payable until the homeowner changes address – perhaps to move into aged-care accommodation – or dies.
Choice neatly summarises its consumer warning: “A reverse mortgage on your home can increase your standard of living in retirement but don’t sign a contract that could put you in danger of losing your home.”
The magazine measured the contracts for 23 reverse mortgages against six standards that it considers minimal for consumer protection. None of the contracts met all of these standards, with 10 contracts meeting five of the standards.
These standards are: default clauses only for major breaches of the contract, unconditional negative equity guarantee (explained earlier), non-fixed loan term, no requests for loan repayment, mandatory legal advice before borrowing, and a dispute resolution scheme.
Reverse mortgages should be approached with a borrower-beware attitude. See: http://www.choice.com.au/viewArticle.aspx?id=105198&catId=100296&tid=100008&p=1&title=Reverse+mortgage+shadow+shop
Before making any investment decision, you should always read the relevant product disclosure statement and consider the product in light of your personal circumstances before deciding whether it is suitable for you.
* Robin Bowerman is Head of Retail at index fund manager Vanguard Investments Australia. To receive this column by email each week go to http://www.vanguard.com.au and register with Smart Investing.
Reverse mortgage take-up growing: study
The value of Australia's reverse mortgage settlements grew almost two thirds last year as retirees tapped home equity to supplement income, a new study shows.
Settlements of new loans grew to $520 million as of December 31 compared with $315 million a year earlier, according to a reverse mortgage study co-authored by actuarial and consulting firm Trowbridge Deloitte.
Some 27,500 reverse mortgages, where lenders make advance payments to owners against the value of a property, were made last year in a market now worth some $1.5 billion, according to the study.
The results highlight how a growing number of product providers and distribution channels has helped the loans gain wider acceptance, said James Hickey, a partner at Trowbridge Deloitte.
"This growth coincides with an increase in the number of product providers, providing improved product flexibility and wider distribution channels," he said.
The study showed use of mortgage brokers to secure the loans is growing.
While 72 per cent of all outstanding loans sales were still direct with the lender, some 46 per cent of loans made in 2006 were through brokers.
That's up from 38 per cent a year earlier.
The average age of borrowers was steady at 74, while the average age of new borrowers last year was 72, the study showed.
Lump sum advances made up 80 per cent of loans with regular draw downs accounting for the remainder.
That shows many home owners are using reverse mortgages to supplement pensions, said Kieren Dell, executive director of Senior Australian Equity Release Association of Lenders (SEQUAL) which co-sponsored the study.
"An increasing number of Australian retirees are recognising the benefits of reverse mortgages," Mr Dell said.
"The increasing use of regular draw downs indicates that these seniors are using the funds more and more to supplement their pensions rather than using their equity for one-off spending."
Drawing down equity on home frees assets, carries downside ris
Drawing down equity on home frees assets, carries downside risk
By Tim Simmers, Business Writer
Article Last Updated: 04/20/2007 06:09:41 AM PDT
BEFORE GETTING a reverse mortgage, Jo Ann Miller and her husband, Carl, were living modestly on Social Security and carefully watching their spending. They had no pensions to fall back on and weren't able to save much while they were working. But they had equity in their San Mateo townhouse. Since the Millers obtained a reverse mortgage, which allows them to draw money from the equity in their home, they feel like they have some breathing room to live better. With the extra money, they bought a hybrid car they wanted in order to help the environment, and they're extremely excited about a monthlong vacation they're taking this summer to Australia. "We were down to a pretty low amount of annual income," said Jo Ann Miller, 65, who spent much of her working years as a secretary. "We're not into a lot of materialistic things. We just wanted a way to cut our costs and travel." For most senior homeowners, the equity in their home is their primary asset. For some, that equity is what they'll pass on to their children. Others, however, see the equity as their money in the bank.
Reverse mortgages allow people 62 or older to draw down the equity on their homes. They can take set monthly payments of $1,000 or $1,500, or whatever they deem necessary, or a lump sum. A lot depends on the specific loan, and not all reverse mortgages are the same, counselors say. There are both critics and advocates of the loans, which often carry high closing costs.
But with a population living longer and baby boomers turning 60 by the thousands each day, reverse mortgages are becoming a fast-growing trend. It's a way of supplementing retirement, paying for steep medical costs or in-house care, or simply cutting costs and traveling, as was the case with Jo Ann Miller. She now has access to a large chunk of money (about $100,000) from the equity in her townhouse that's valued at about $550,000. She and her husband have three children among them, but the children aren't dependent on a big inheritance, she added.
So they went ahead with the reverse mortgage to live a little better.
Closing costs
The only stickler, Jo Ann Miller said, was the $17,500 in closing costs. "That's kind of expensive," she said. That appears to be the going rate for closing costs, so be aware of that if you're considering a reverse mortgage. Still, for many people, such as widows who never dealt with family finances, or seniors who are running out of money and need access to cash, the reverse mortgage can make sense. "Sometimes it's done for need and sometimes for choice," said Judy Schwartz, co-owner of Reverse Mortgages Only in San Carlos. "You give people the choice to access equity on their home, but you do build a debt on the property." As a purveyor of such loans, Schwartz tries to understand "what the family's needs are." She stresses that ownership of the property does not change hands, and the title of the property remains with the homeowners. The formula for determining how much you can draw from your house is based on the fair market value of your home, your age and amount of equity in the home.
The younger you are, the less money you have access to. In government loans of the kind obtained through the Federal Housing Administration/U.S. Department of Housing and Urban Development (HUD), there's a lending limit of $362,790. The interest rate is based on the one-year Treasury bill, plus 1 percentage point (currently 6.01 percent). Counseling is mandatory for seniors getting these loans through the government. That way they know going in about varying interest rates and high closing costs, which people sometimes don't notice because it comes out of the equity of their home.
No free money
For many people taking a reverse mortgage, a key consideration is that by the time a child or heir is to inherit the house, the debt could be too high to pay off, forcing a sale of the property.
"There's no such thing as free money," said Cherisse Baptiste, a reverse mortgage counselor for Echo Housing in Hayward. "People have to understand what's involved." Besides high closing costs and the impact on children or heirs, Baptiste stressed that you also need to make sure you know what the interest rate is that compounds daily on what you owe, and that reverse mortgages involve a rising debt that eventually must be paid out of your equity.
That often means selling the home to pay off the debt, or your heirs selling it after you pass away. "What is left over for your heirs might not be as much as you expected because of higher interest rates and closing costs," Baptiste said.
Getting advice
Eleanor Curry, 79, a retired communications specialist, said the key to getting a successful reverse mortgage is working with the right advisers. "You have to have people you can trust, and they have to make it very clear what you're doing," said Curry, who took a lump sum from her San Carlos home. She praised her advisers, Judy Schwartz and her partner John Edwards at Reverse Mortgages Only. "I'm awestruck," said Curry, about the reverse mortgage she just obtained. Curry and her husband, Richmond, have eight children, 23 grandchildren and 15 great-grandchildren, "but they are well taken care of and aren't dependent on an inheritance," she said. "It's our money, and we can do whatever we dreamed about now, like traveling, repairing the house, going back to school," she said. "I'm completely relaxed now."
Still, critics of the loans warn seniors, especially older ones, of the high "front-end costs" of the loans, and point out that there are alternatives. Those might be home-equity lines of credit, taking in roommates or selling the house and moving to get access to money.
Seeing a counselor about alternatives is advised. "The basic problem from a consumer's perspective is that unless you are in your late 60s and in good health, it is a very poor investment because all the costs are front-loaded," said Niall McCarthy, an attorney and partner at Cotchett, Pitre & McCarthy in Burlingame.
Winning refunds
The group has done multiple class-action lawsuits against reverse mortgage lenders and was able to refund millions of dollars to senior citizens. However, advocates of the loans say the market has matured, and they say reverse mortgages are good for certain people.
"Reverse mortgages can make a great deal of sense, as long as the fees are reasonable," said Allen Cymrot, investment adviser and founder of http://www.netgainrealestate.com, a Mountain View-based Web site for income property investors. "(Reverse mortgages) serve a need, but they're not for everybody. You've got to understand what you're getting into."
Reversing on your equity
Reversing on your equity
The reverse mortgage market gets in gear
By Victoria Young
Mon, 19 Mar 2007
The reverse mortgage market has exploded, providing a huge opportunity for financial planners, but the advice industry has mixed feelings about how to approach them.
Financial advisers have a universal reaction to reverse mortgages, financial services consultant Paul Resnik says. "Basically they all start off with the sphincter muscle response. Which is this [crosses his arms and purses his lips]. Why? Because they know the power of compound interest, they're afraid of litigation and in a way it's a sense of failure. It's a failure for them to think that their clients might need [a reverse mortgage]. They need to relax the sphincter muscle," Resnik says.
Up to 20,000 Australian home owners had a combined $1.1 billion in reverse mortgages at June 2006, according to Trowbridge Deloitte research commissioned by the Senior Australians Equity Release Association of Lenders (SEQUAL). The market has doubled in the past 18 months and it is forecast to explode to $15 billion in the next couple of years, fuelled by retiring baby boomers and the chronic superannuation gap. What does this mean for planners? Resnik believes the burgeoning market represents a huge opportunity.
"I think including the house as a liquid asset [in a financial plan] is the most sophisticated, demanding, professionally difficult activity that we've ever known. This is the natural place for financial planners to differentiate themselves," he says. "I have an argument that may be naïve, which goes: 'You're either product salesmen or you're not.' Who's got the right to deprive people of choice? I think this goes right to the heart of being a professional when you're able to suspend some of your own prejudices and give people choice."
Reverse mortgages have a chequered past. British retirees snapped them up in the 1980s. When house prices slumped, debt exceeded the value of their property and many lost their homes. Eighteen months ago SEQUAL executive director Kieren Dell did the rounds of the major dealer groups and met with degrees of resistance.
"Most said 'I can't believe our clients would ever need a reverse mortgage', or 'what are they?' Some of the groups got it together early and in the last 12 months it's been a case of [other dealer groups] playing catch up," Dell says.
"The problem for [dealer groups] is twofold. They can't just buy research like they do on investment products from van Eyk or Morningstar, they've had to go and do their own. Also, because they're credit products they're not governed by the Financial Services Reform Act (FSRA). They couldn't just slot them in during the normal process."
Trowbridge Deloitte surveyed 24 of the 30 main dealer groups in November. It found the majority had a reverse mortgage on their approved product list (APL). Importantly, half of the dealer groups believed equity release would be an important financial planning tool within the next one to two years, while a quarter believed it would be in the next 24 to 36 months, and the other portion believed the market would take off in three years or more. Product quality and training were found to be the greatest areas of concern for dealerships. Unprompted, most said the reverse mortgage should be a product governed by FSRA. The major reverse mortgage providers to the dealer groups according to business share are Bluestone Equity Release, Macquarie Bank and OFM, the research found.
Three years ago, banks, including Commonwealth Bank of Australia and St George Bank, were the traditional providers of reverse mortgages, supplying between 80 per cent and 90 per cent of the market through direct sales, according to Dell. "Research last year showed about 43 per cent [of reverse mortgages written] was through intermediaries. Today a more diverse group of providers has led to more diverse distribution. We're about to redo the research and I wouldn't be surprised to see it tip over 50 per cent," he says.
Equity release is a specialist competency, Tandem Financial Advice managing director Andrew Doquile says. The independent dealership added a reverse mortgage to its APL in September 2006 and developed specific technical, research and training to support its planners. "Advisers without the resources will struggle with this complex advice. The product has some serious implications for those clients whose advisers or brokers embark on this advice without the correct support or for those only interested in the dollars generated in commission," Doquile says.
"At Tandem we control the advice process so that we are sure from this perspective, we have as much certainty as we do across our financial planning business. Any relatively unregulated sales regime where large sums of money are paid on a commission basis is open to misuse by unscrupulous or greedy individuals. I imagine that brokers will have to live with the taint of product sales simply to max commission until this part of the industry is regulated effectively." Conversely, Capstone Financial Planning managing director Grant O'Riley has adopted a watchful approach.
"At this point in time the licensee has not aligned with any reverse mortgage providers. There are people who are sceptical. It's only going to take one or two misuses of the product and it'll all blow up. Capstone is sitting back and waiting to see what happens in the market," O'Riley says. Mariner Financial head of equity access Jim Brooks is poised to take advantage of the burgeoning market. Mariner Equity Access is on 30 APLs used by about 8500 brokers and planners. Mariner is in talks with groups that could provide access to another 1500 to 2000 professionals.
"I also think there's a view perhaps from the dealer groups as well that if they don't offer this facility through their planner networks then someone else will. I think it's increasingly becoming a legitimate retirement tool from a dealer group perspective," Brooks says. "We've seen the number and the demographics in the superannuation entitlements that people have in retirement, typically it's around $80,000, so we know that it's not going to last them forever. I think over time this will be a very mainstream product once we solve some issues around the risks involved."
When Brooks approached dealer groups 12 months ago with the equity release product, he found many were reluctant, uncertain about the risks and considered it dangerous. He blames negative press, particularly from the United Kingdom, for the equity release myths and misconceptions. The Australian market has learnt a lesson from the UK experience and produced products with safeguards to reflect that, he says. The "no negative equity guarantee" in the SEQUAL code of conduct, for example.
A reverse mortgage shadow shop by independent consumer watchdog Choice has generated more bad press. Cash-strapped retirees may risk losing their homes because of wide default clauses in contracts and a poor standard of information, it warned.
Choice visited 15 mortgage brokers and lenders then analysed 23 reverse mortgage loans. The majority of salespeople encouraged shadow-shoppers to take out the maximum possible loan and failed to give them the information they needed to make a proper decision, the survey concluded. "Choice has raised interesting comparisons in their research into the products available and it becomes more and more clear that contract definitions and interpretations are very difficult to compare. It appears that how you say a thing is as important as what you say. It is possible that we will eventually end up with a market for those who research and rank definitions in a similar fashion to that used in risk research," Doquile says.
Choice plans to lobby all state governments to adopt the New South Wales mortgage broker legislation. This legislation ensures all mortgage lenders have a licence and a dispute resolution scheme and requires all advice on reverse mortgages to meet a minimum standard. The Choice findings sparked a call by the Mortgage and Finance Association of Australia (MFAA) to create market standards. The MFAA has produced a Code of Proper Process for equity release products and helped to deliver an education program endorsed by SEQUAL. Bluestone Equity Release is a major product innovator and strives to set market standards. When it launched in April 2004, it was the only specialist equity release product in the market, according to chief executive officer Peter McGuinness. The company draws on the UK heavily.
"The UK market was dominated by products that offer fixed-for-life protection. And it's an unusual concept in the Australian market because it's not a fixed rate market, and for life, wow, that's a long time. We launched [a fixed-for-life product] and within a year we started to see a number of institutions offer that product as well," McGuinness says.
"And the percentage of business that's now being written on a fixed rate basis is actually starting to grow quite rapidly. Financial planners, interestingly, see that as important because they obviously try to forecast when giving a client advice and anything that can deliver a high degree of protection and certainty in the financial plan has got to be seen as positive." New products use equity in the home to fund aged care accommodation bonds and innovations centre on the delivery of money to the client.
"Historically, reverse mortgages have been used as quite blunt instruments - a lump sum of money was delivered. In order to stimulate the financial planning world we have had to innovate the product so financial planners have had more flexibility in how they draw down the equity, because what the financial planner doesn't necessarily want is a $300,000 lump sum. What they actually need is money to be drawn down over time. We rolled out an instalment product 18 months ago." Bluestone is the only lender in Australia and New Zealand to offer a variable rate product that is capped for life. The new superannuation rules will spark hybrids of standard mortgages and reverse mortgages, McGuinness believes.
"There's an opportunity for a product where clients can at perhaps a slightly younger age withdraw equity while they're still working, but use the money to contribute to superannuation and then role into an equity release product when they hit retirement. We'll start to see products that facilitate more exciting superannuation strategies," he says. With increased regulation, education and consumer demand, reverse mortgages will become an integral part of Australia's financial landscape. Advisers should think about whether they plan to relax the "sphincter muscle response" sooner rather than later.
http://www.investordaily.com.au/1483.htm?pageid=3
Subscribe to:
Posts (Atom)