The Retirement Income Gap and Reverse Mortgages

Both in Australia, and around the globe, the retirement income gap has continued to increase over the years based on a couple of key factors, including a rise in the cost of living, and an ageing population.

The ageing population means that more people will be living longer and spending a higher portion of their lives in retirement. Any retiree with personal savings or superannuation will need to allow this to be stretched over many more years, and the possible need for aged care will mean increased demand for support services.

According to the Australian Bureau of Statistics, by 2057, it is projected there will be 8.8 million older people in Australia (22% of the population); and by 2097, 12.8 million people (25%) will be aged 65 and over.

Research from RMIT reports that almost 90% of older Australians want to remain in their home as long as possible, however, 36% live in a home that may be unsuitable for ageing in place, without upgrades or renovations.

The Federal Government’s retirement income review released in November 2020 suggests that there are areas where the retirement system could be improved to allow more independence in retirement, and supports the use of equity release products such as reverse mortgages as a solution to financing this independence.

The report suggests that the family home is underutilised when it comes to funding retirement and accessing its equity could substantially improve retirement incomes for many people.

Equity release could allow retirees to age in place while also achieving their immediate and future financial needs, to enjoy a more comfortable retirement and remain in their own home for as long as they choose.

Some recent international research published by The European Pensions and Property Asset Release Group (EPPARG) and EY also predict that the global equity release market could more than triple over the next decade, which in turn will increase the demand.

There are a few different types of equity releases, however, one of the most popular is a reverse mortgage. 

What is a reverse mortgage?

A reverse mortgage is like a regular home loan that is designed for the needs of those aged 60 or more. Like a home loan, the lender will take a first mortgage over your property, however, there are some key differences with a reverse mortgage that can make it more suited to ageing in place than other financial products. These include:

• No regular repayments – No regular repayments are required until the end of the loan. Most other financial products require monthly repayments to be made, which is difficult when you no longer have a regular stream of income in retirement. With a reverse mortgage you can voluntarily choose to make partial repayments at any time, but do not have to.
• Flexible drawdown options – You can drawdown funds in various ways depending on your provider. Often they will provide an initial lump sum payment (great for consolidating outstanding debts), regular advances (where you receive regular loan advances periodically for up to 10 years), and a cash reserve (like a ‘line of credit’) which can be used like an emergency fund to request when needed. Some providers also allow redraw facilities.
• Flexible loan purposes – As everyone has different needs in retirement, reverse mortgages can be used for almost any purpose that could make your retirement more comfortable. Some of the most common loan purposes include home improvements, debt consolidation, day to day expenses, upgrading your car, travel, and aged care.

With a reverse mortgage, interest is capitalised and added to the loan monthly. The total loan balance including accumulated interest is due when the borrower moves permanently from their home, either when they sell or pass away. Loan repayments can be made voluntarily at any time.

Reverse mortgage protections

Reverse mortgages are now arguably one of the most heavily regulated consumer finance products in Australia due to the enhanced consumer protections introduced by the Federal government in 2012. In addition to not requiring regular loan repayments, these also include:

• No Negative Equity Guarantee – Borrowers cannot owe more than the net sale proceeds of the property when they are required to repay their loan.
• Lifetime Occupancy – You can remain living in your home for as long as you wish while retaining 100% ownership.

Some providers also have additional features such as an Equity Protection Option that allows you to protect a percentage (can be up to 50%) of the eventual net sale proceeds of your property, and a 30-day cooling-off period.

These protections are designed to safeguard borrowers and provide additional peace of mind when taking out a reverse mortgage.

What do I need to consider before taking out a reverse mortgage?

An important factor when deciding to take out a reverse mortgage is thinking about future needs. This includes ongoing living expenses, aged care costs, medical expenses and plans to leave funds to beneficiaries.

To assist you in making an informed decision, ASIC (the Australian Securities and Investments Commission) has developed a calculator which illustrates the amount of equity that will remain in your home under different scenarios. Visit ASIC’s Money Smart Reverse Mortgage Calculator to complete a calculation.

What are the eligibility requirements?

To be eligible to apply for a reverse mortgage, you must be aged 60 or over, and own a residential property in Australia, either outright, or if there is any remaining mortgage left this can be paid out at settlement. To learn more, visit Heartland.