The regulatory environment for reverse mortgages

The introduction of the National Consumer Credit Protection Act (2012) (NCCP) provided the foundation for access to home equity in Australia by stipulating clear consumer protections and market parameters at both the beginning and end of all loans.

Before the NCCP, poor product design meant many reverse mortgage customers (and their mortgage brokers) had sub-standard experiences. It’s important to note those days are behind us and all new business written comes with protections that include:

• Prospective loan-to value ratios (LVR): At 60 years, borrowers can obtain 15% of their home value, increasing 1% for every year of age—i.e. 25% LVR at age 65. LVRs above this are presumed to be unsuitable for the borrower.
• No negative equity guarantee: Borrowers cannot owe more than 100% of the market value of their home when it is sold. Lenders cannot claim against the borrower or estate any amount in excess of the value of the home. This protection is being introduced by the government for its Centrelink Home Equity Access Scheme this year.
• Guaranteed occupancy: Borrowers cannot be evicted or foreclosed based on longevity, property prices or the value of the loan, in other words, borrowers can stay in their home for as long as they choose.
• Responsible lending: Credit providers must enquire about the possible future requirements and objectives of the customer including the ability to live in the home without hardship, future aged care needs and future bequests.
• Consumer disclosures: Credit providers must give borrowers projections of future home equity concordant with the ASIC MoneySmart calculator, an information statement, occupancy protection information and provide annual statement and servicing.
• Enforcement and discharge: Loan default provisions are limited in circumstances of serious contractual breach and must be notified via direct personal communication.

A 2018 ASIC review found these protections to be robust. The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, held around the same time, did not receive submissions with respect to reverse mortgage products.

The overall conclusion from a review of reverse mortgage policy and legislation is that the foundations of responsible, long-term access to home equity to fund retirement are in place to meet the needs of Australian retirees alongside their superannuation, pension entitlements and other investments.

Benefits of responsible access to home equity

By providing responsible access to home equity, retirees receive multiple benefits:

1. Access to savings: where the majority of lifetime savings are in the home, these are now available to improve retirement funding.
2. Improved retirement funding: where the Age Pension and superannuation are inadequate, home equity can improve retirement funding.
3. More reliable retirement income: for some retirees, income may be volatile relative to the performance of superannuation. Home equity can smooth income and capital supply.
4. Meet large capital needs: retirees can utilise reverse mortgages to meet large capital needs, enabling them to retain their income producing assets.
5. Sequencing risk management: responsible, long-term access to home equity adds a second, independent, largely uncorrelated source of income should super assets decline periodically.