Reverse mortgage lenders are too risk averse

Lenders that are serious about doing business in the equity release market should improve the terms of their reverse mortgages and consider introducing home reversion products.

Academics from the School of Risk and Actuarial Studies at the University of New South Wales presented the findings of their research into equity release at the Actuaries Institute conference in Sydney yesterday.

One of the team's members, Katja Hanewald, said Australian lenders have tended to be highly risk averse in setting the terms of their reverse mortgages. The average loan-to-valuation ratio for a 65-year-old is 15 per cent.

Hanewald said: "Lenders face substantial risks in the form of house price risk and longevity risk, but a reverse mortgage is not as risky as banks are assuming.

"Borrowers face a significant disincentive to go into a reverse mortgage because they are being asked to give their whole house as collateral for a relatively small loan. Reverse mortgage LVRs in overseas market are much higher.

"Lenders could consider increasing LVRs as a way of generating growth."

According to the annual survey of the reverse mortgage market by Deloitte and the Senior Australian Equity Release Association, at the end of 2011 there were just 42,410 outstanding reverse mortgages.

Hanewald said it was surprising that more financial institutions did not offer home reversion contracts. The only active provider in the market currently is Homesafe, which is a joint venture between Bendigo and Adelaide Bank and the product's designer, Peter Szabo.

In a typical home reversion contract the home owner sells a share in the house to a financial institution. The seller receives a lump sum that is discounted to take account of a "lease" that allows the home owner to stay in the house for life (or until it is sold).

Hanewald said home reversions had some attractive features: the home owner does not take on any debt; and the home owner can determine how much of the equity he or she wants to sell (the can retain equity to provide an inheritance).

"The home owner and the financial institution both have an interest in seeing the property increase in value. There is a good alignment of interest," Hanewald said.

She said it was inevitable that equity release would play a bigger role in generating retirement incomes, with residential property making up 54 per cent of the wealth of people aged over 75.