A growing number of seniors are taking out reverse mortgages – is it right for you?
- Replies 3
The number of senior homeowners taking out a government-backed reverse mortgage has soared over the past three years and it is expected to increase again due to a single change in the system, as well as pressures related to the rising cost of living.
Before we get into the nuts and bolts of this article, let’s brush up on how reverse mortgages work. We only learnt about this term recently ourselves! A reverse mortgage allows senior homeowners to borrow money against the security of their property. If they fail to pay it back, the debt increases. It will be paid off when the property is sold or the borrower passes away.
Commercial loans taken out since 2012 have no negative equity guarantee, this means that borrowers cannot owe more than the value of their stake in their home, and this condition was also added to the government scheme update.
Since July 1, participants in Centrelink’s Home Equity Access Scheme, which lets homeowners borrow against their homes, now have the option to take an advance payment of their loan instead of a series of payments.
Centrelink’s Home Equity Access Scheme was recently updated. Source: Inc. Magazine
The changes followed after new figures from Services Australia showed that the number of participants in the scheme had risen to 6041 in June 30 from 768 three years ago, all of which, if combined, amount to a total owed of $138 million.
The program was formerly known as the ‘Pension Loans Scheme’, and has been growing at over 40 per cent per year since accessibility was improved and full pensioners were included in July 2019. The scheme was rolled out after commercial reverse mortgages dwindled.
Gerard Brody, Chief Executive of Consumer Action Law Centre, explained that the lump sum option is appealing to borrowers and he expected demand to continue rising.
‘The reality is there’s a lot of wealth tied up to housing in Australia and people are looking at ways to use that wealth during their lifetime,’ Mr Brody said. ‘I can see why this is an option that people are considering.’
Mr Brody encouraged older Australians to do their sums to understand how the debt would compound. He also recommended considering other options such as ‘downsizing’.
A spokesperson from the Department of Social Services stated: ‘These changes provide more options and greater flexibility for users of the scheme and are expected to increase the number of older Australians choosing to participate.’
Before 2019, participants of the scheme could draw a fortnightly income of up to the full pension rate (including any existing pension payments), making it exclusive to part pensioners and a few self-funded retirees.
The scheme may be a good option for some seniors. Source: Yahoo! Finance
But starting July 2019, participants were given an option to draw a fortnightly income of up to 150 per cent of their full pension rate.
However, figures from the Australian Prudential Regulation Authority showed that the commercial market continued to fall. The value of outstanding reverse mortgage loans held by banks, building societies, and credit unions dropped to $2.21 billion by the end of March 2022 from $2.7 billion in 2019.
A Finance Expert at Canstar, Steve Mickenbecker, said that the commercial reverse mortgages have not lived up to expectations.
‘Reverse mortgages were developed with great hope that they would provide the financial solution for asset-rich, cash-poor retirees to fund the retirement lifestyle they aspired to,’ he said.
But Mr Mickenbecker added that early offerings in the market delivered unfavourable outcomes to customers because of ‘significant trade-offs and some risk to the borrower’.
He said that many providers backed out from the market amid the global financial crisis as they cost a fortune to run. The market has not recovered, and the chances of it improving are low because of the rising interest rates that would not only make the debt compound faster but may also cause the value of the property to drop.
Deb Shroot, a Financial Counsellor for the National Debt Helpline, revealed that she sometimes recommended the scheme to clients, explaining that it worked similarly to hardship programs run by councils to allow older people to defer their rates.
‘If these types of programs are enabling people to stay in their homes longer, then they can be a really good option for people so long as they’re going through adequate checks to make sure that they’re suitable and then not charging an unaffordable interest,’ she said.
Shroot added that the main reasons why seniors reached out to the National Debt Helpline were credit card debts, utilities and energy bills (and the rising cost of living generally), and unaffordable rates and strata debt.
To help you decide whether you want to apply for Centrelink’s scheme, you may use the Home Equity Access Scheme eligibility calculator. You may also click here to measure how much you can borrow.
Need to contact the National Debt Helpline? Call 1800 007 007 to speak with a Financial Counsellor.
What are your thoughts on Centrelink’s Home Equity Access Scheme? Let us know in the comments below!
Learn more about this scheme by watching the video below:
Source: 7News Australia
Before we get into the nuts and bolts of this article, let’s brush up on how reverse mortgages work. We only learnt about this term recently ourselves! A reverse mortgage allows senior homeowners to borrow money against the security of their property. If they fail to pay it back, the debt increases. It will be paid off when the property is sold or the borrower passes away.
Commercial loans taken out since 2012 have no negative equity guarantee, this means that borrowers cannot owe more than the value of their stake in their home, and this condition was also added to the government scheme update.
Since July 1, participants in Centrelink’s Home Equity Access Scheme, which lets homeowners borrow against their homes, now have the option to take an advance payment of their loan instead of a series of payments.
Centrelink’s Home Equity Access Scheme was recently updated. Source: Inc. Magazine
The changes followed after new figures from Services Australia showed that the number of participants in the scheme had risen to 6041 in June 30 from 768 three years ago, all of which, if combined, amount to a total owed of $138 million.
The program was formerly known as the ‘Pension Loans Scheme’, and has been growing at over 40 per cent per year since accessibility was improved and full pensioners were included in July 2019. The scheme was rolled out after commercial reverse mortgages dwindled.
Gerard Brody, Chief Executive of Consumer Action Law Centre, explained that the lump sum option is appealing to borrowers and he expected demand to continue rising.
‘The reality is there’s a lot of wealth tied up to housing in Australia and people are looking at ways to use that wealth during their lifetime,’ Mr Brody said. ‘I can see why this is an option that people are considering.’
Mr Brody encouraged older Australians to do their sums to understand how the debt would compound. He also recommended considering other options such as ‘downsizing’.
A spokesperson from the Department of Social Services stated: ‘These changes provide more options and greater flexibility for users of the scheme and are expected to increase the number of older Australians choosing to participate.’
Before 2019, participants of the scheme could draw a fortnightly income of up to the full pension rate (including any existing pension payments), making it exclusive to part pensioners and a few self-funded retirees.
The scheme may be a good option for some seniors. Source: Yahoo! Finance
But starting July 2019, participants were given an option to draw a fortnightly income of up to 150 per cent of their full pension rate.
However, figures from the Australian Prudential Regulation Authority showed that the commercial market continued to fall. The value of outstanding reverse mortgage loans held by banks, building societies, and credit unions dropped to $2.21 billion by the end of March 2022 from $2.7 billion in 2019.
A Finance Expert at Canstar, Steve Mickenbecker, said that the commercial reverse mortgages have not lived up to expectations.
‘Reverse mortgages were developed with great hope that they would provide the financial solution for asset-rich, cash-poor retirees to fund the retirement lifestyle they aspired to,’ he said.
But Mr Mickenbecker added that early offerings in the market delivered unfavourable outcomes to customers because of ‘significant trade-offs and some risk to the borrower’.
He said that many providers backed out from the market amid the global financial crisis as they cost a fortune to run. The market has not recovered, and the chances of it improving are low because of the rising interest rates that would not only make the debt compound faster but may also cause the value of the property to drop.
Deb Shroot, a Financial Counsellor for the National Debt Helpline, revealed that she sometimes recommended the scheme to clients, explaining that it worked similarly to hardship programs run by councils to allow older people to defer their rates.
‘If these types of programs are enabling people to stay in their homes longer, then they can be a really good option for people so long as they’re going through adequate checks to make sure that they’re suitable and then not charging an unaffordable interest,’ she said.
Shroot added that the main reasons why seniors reached out to the National Debt Helpline were credit card debts, utilities and energy bills (and the rising cost of living generally), and unaffordable rates and strata debt.
To help you decide whether you want to apply for Centrelink’s scheme, you may use the Home Equity Access Scheme eligibility calculator. You may also click here to measure how much you can borrow.
Need to contact the National Debt Helpline? Call 1800 007 007 to speak with a Financial Counsellor.
What are your thoughts on Centrelink’s Home Equity Access Scheme? Let us know in the comments below!
Learn more about this scheme by watching the video below:
Source: 7News Australia
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