A report capturing the experiences of home-owners with a reverse mortgage has been released by ASIC.
The report, All we have is this house reveals that while the borrowers interviewed were generally satisfied with the reverse mortgages they had taken out, several factors inhibited Ã¢â‚¬Ëœgood consumer decision-makingÃ¢â‚¬â„¢.
The report identified several factors that have the potential to hinder informed decisions and increase the risk of future problems, including:
* a lack of familiarity with reverse mortgages;
* the complex nature of these financial products and their dissimilarity to other credit products,
* difficulties budgeting for the long-term with access to a large amount of credit, and estimating how much equity might be available at any time in the future;
* a reluctance to consider the risk of declining health in the future and the impact of this on their financial needs; and
* children encouraging their older parents to take out a reverse mortgage or use the funds for the benefit of these children, in inappropriate circumstances.
ASICÃ¢â‚¬â„¢s Executive Director of Consumer Protection, Mr Greg Tanzer said very few of the borrowers interviewed were aware of all the conditions of their loan and the serious consequences of not meeting these obligations.
Ã¢â‚¬ËœMany of those ASIC spoke to did not know how much the loan was likely to cost them over time, and more than half did not know what would happen if they breached a loan condition. Most people did not have tailored projections about the likely long-term cost of a reverse mortgageÃ¢â‚¬â„¢, he said.
Ã¢â‚¬ËœVery few borrowers appeared to have considered how their financial needs might change over the next 10 or 15 years. When borrowers looked forward, they usually only looked two to three years ahead. The average life expectancy for a 65 year old is about 20 years. Therefore, planning needs to cover a much longer time period than most borrowers had considered.
Ã¢â‚¬ËœSome borrowers had difficulty budgeting. One borrower with a reverse mortgage said it was Ã¢â‚¬Ëœlike having a credit card with a $100,000 credit limit and no repaymentsÃ¢â‚¬â„¢. In general, borrowers who had a clearer plan of their needs before taking out the reverse mortgage were finding it easier to budgetÃ¢â‚¬â„¢, Mr Tanzer said.
The report notes, Ã¢â‚¬ËœSeveral borrowers commented about how difficult it had been to resist the constant availability of credit. A small number were already expressing regrets about how they had used their reverse mortgage and how quickly they had exhausted the funds they had borrowed.Ã¢â‚¬â„¢
Mr Tanzer said the report included recommendations encouraging industry to tailor their practices to the consumer issues around these new and developing products, improve information for consumers, and improve consumer access to advice.
Ã¢â‚¬ËœWhile reverse mortgages can be a useful way for older people to access the equity in their homes, the products have significant risksÃ¢â‚¬â„¢, Mr Tanzer said.
Ã¢â‚¬ËœIn the right circumstances, a reverse mortgage might assist an older person. However, these products have unusual features. People should think carefully about their situation before using an equity release product. They need to select a suitable product and use it in the way that suits their overall needs.Ã¢â‚¬â„¢
Ã¢â‚¬ËœASIC continues to work with industry on the issues identified in this report. We support the actions of SEQUAL and other industry bodies in developing improved standards of conduct for lenders and intermediaries in this evolving marketÃ¢â‚¬â„¢, Mr Tanzer said.*
ASIC undertook the research to more clearly understand the factors that can influence consumer decision making. Specifically, this work sought to identify where these products had worked well, how borrowers might be vulnerable or easily misled and what changes could help consumer make better, more informed decisions.
ASIC interviewed 29 borrowers, keeping the sample to this size to enable the collection of comprehensive information during interviews and access to information from lenders about each loan. The survey was not designed to represent the market generally, and should not be seen in this light.
A reverse mortgage is a loan where the consumer borrows money against the equity in their home. The loan and interest is not repaid until the home is sold.
* SEQUAL is the Senior Australians Equity Release Association of Lenders, the industry body for reverse mortgage lenders.
ASICÃ¢â‚¬â„¢s reports are available from ASICÃ¢â‚¬â„¢s website at www.asic.gov.au/reports:
* REP 109 – All we have is this house Consumer experiences with reverse mortgages, November 2007.
* REP 59 – Equity release products report A report into equity release products such as reverse mortgages, home reversion schemes, and shared appreciation mortgages, November 2005.
Information for consumers about equity release products, including checklists of things to consider and a reverse mortgage calculator, is on ASICÃ¢â‚¬â„¢s consumer website, FIDO, at www.fido.gov.au/equityrelease
Download the report