Reverse mortgage settlements slump

A combination of caution on the demand side and funding constraint on the supply side has hit the reverse mortgage market. Settlements of  $122 million in the June half were down 32 per cent on settlements of $180 million in the June half last year, and down 13 per cent on settlements in the December half.

According to the latest Deloitte Sequal reverse mortgage survey, released yesterday, outstandings increased five per cent to $2.6 billion in the June half. The number of borrowers in the market increased 1.4 percent to 38,048.

Senior Australians Equity Release Association of Lenders chief executive Kevin Conlon said membership of his organization fell from 11 to nine during the June half and of those seven were active lenders.

Sequal lobbied the Government to have reverse mortgage securitisation included in the Australian Office of Financial Management's latest round of investment in the mortgage market but was not successful.

The industry was not helped by comments made by the chairman of the Australian Securities and Investments Commission, Tony D'Aloisio, in June at the launch of a consumer guide to the product.

D'Aloisio said: "Our research shows that people find it difficult to understand these products. One of the big challenges is how to estimate the long-term cost of reverse mortgages and ensure there is enough equity left to fund future needs.

"We're also concerned that people are sometimes encouraged to borrow more money then they actually need, ultimately at a greater cost to them."

Deloitte Actuaries partner James Hickey said loan to valuation ratios on reverse mortgages showed that borrowers were not borrowing too much. People over 80 years of age can borrow up to 40 per cent of the value of their property but the average LVR was only 24 per cent.

People over 70 could borrow close to 25 per cent of the value of their property but the average LVR was close to 15 per cent. Younger borrowers use a larger proportion of the available facility.

Hickey said the discharge rate of nine per cent a year indicated that many borrowers were using reverse mortgages for medium term financial planning needs and were not necessarily committed to a lifetime of interest capitalisation.

The main uses of the funds are to provide income, make home improvements and repay debts.