People who use reverse mortgages as part of their retirement income planning tend to be satisfied with the product, mainly because it allows them to continue to live in their homes. Most other people worry about the final cost of the loan and steer clear.
Researchers from the RMIT University Centre for Urban Research analysed a de-identified data set provided by Heartland Seniors Finance of more than 11,000 reverse mortgages taken out between 2004 and 2018 and more than 1000 “new loans” taken out in 2018/19.
They also analysed the available academic, industry and regulatory literature on reverse mortgages to get an understanding of why the product has not sold well in Australia.
Among all borrowers, the main reason for taking out a reverse mortgage is home improvements, followed by paying debts, providing extra income, buying a car and going on a holiday.
Among the 2018/19 cohort, the main reason for taking out a loan was to pay debt, reflecting that fact that more recent retirees are going into retirement with debt.
People aged 61 to 81 are more likely to be borrowing for home improvements or a car, while people over 90 are more likely to be borrowing to cover aged care costs.
The mean initial drawdown is A$61,065 and the average age of borrowers at the time of the initial drawdown is 70.
The median loan term is 7.4 years. The average for young retirees (under 60) is five years, which suggests that loans may be used as a transitional funding arrangement until superannuation is available.
Loan-to-valuation ratios range from around 12 per cent for people in their 60s, close to 15 per cent for people in their 70s and almost 20 per cent for people in their 90s.
Older people are more likely to need more for health care and aged care, and lenders are prepared to offer higher LVRs because the longevity risk is lower for older borrowers.
Things that borrowers like about reverse mortgages are the fact that they don’t have to make repayments and they can continue to live in their home.
Looking at the broader literature, most older Australians want to “age in place”, with 87 per cent of people aged 65 to 74 want to stay where they are or within 10 kilometres of their current home.
Many older people are fearful of moving into institutional settings, such as nursing homes and high-care facilities.
This suggests there should be greater use of reverse mortgages. However, people are reluctant to plan for their late retirement, when they might be ill or have end-of-life needs.
And consumers have a poor understanding of the future cost of reverse mortgages.
Internationally, reverse mortgage markets are growing. The Canadian market grew at an average rate of 31 per cent a year over the eight years to 2018. The UK market grew 8 per cent a year from 2015 to 2019.
But in Australia the market has struggled. According to APRA data, reverse mortgage balances were just $2.5 billion in June – down from $2.7 billion a year earlier.