1st August 2007

This newsletter continues in the series of newsletters that looks at options for seniors whose wealth resides in their own home. Previous newsletters discuss what a reverse mortgage is (Jan ’06), the uses of a reverse mortgage (Jul ’06), comparing taking a reverse mortgage to downsizing (Jun ’07) and comparing taking a reverse mortgage to a Line Of Credit and investing the proceeds in the share market (July ’07).

There are three specific product types aimed at the seniors market, the reverse mortgage (RM), a shared appreciation mortgage (SAM) and a home reversion scheme (HRS). Each has their own strengths and benefits and conversely each has its own costs or risks that need to be considered.

Reverse Mortgage – this is by and far the most popular product offering on the market. There are over 20 lenders and because of the popularity, more lenders are starting to introduce the product into their range. They have a history back from the 1980’s from UK and US markets, where the benefit of hindsight has produced a far more robust model being offered to Australian seniors.

Advance Bank offering a form of this product back in the 1990’s but was withdraw due to lack of demand. When St George took over Advance Bank, they re-introduced the product in 2003. CBA also released their version in late 2003 and since then the number of lenders has progressively increased. A group of 8 founding lenders formed an association, SEQUAL, whose aim is to assure consumers and industry participants alike of the quality and integrity of its members, and the way members conduct their business. There are now 12 lenders who sign up to their code of conduct. (see Links page for SEQUAL details).

I have covered how a reverse mortgage works in some detail in other newsletters, so as a summary, seniors access equity in their home, which for many older Australians is their superannuation and main source of wealth, to be able to take out cash based on their age and the value of their home. It is a conservatively based scheme (for the lender) as they will only lend based on those two factors. At age 60, with an average life expectancy of 20 to 25 years, they will lend around 15% of the value of your property. As there is no requirement to repay interest or principal during the period of the loan (it is repaid on death, move out permanently or sale of the property), the loan value outstanding increases over time due to compounding of interest.

The security for lenders has been based on the expectation that the market value of property will continue to increase over time. Most lenders restrict where they will lend to adding further protection for themselves. There are a whole range of options now available for a senior to specify how they want to access their equity, a lump sum up front, a monthly ‘income’ stream, a cash reserve facility or a combination of the three. There are interest rate options with some lenders offering long term fixed rates, some for life and others offering caps. It is estimated that if the underlying property market value increases by around 3.5 to 4% per annum, your equity in your property will be maintained.

You can see from the above graph, the value of the home (blue area) increases over time as does the loan balance (red area). For this graph, it is based on a home worth $350,000, a 65 year old borrower, 8.8% interest (there are cheaper), an initial lump sum of $50,000 and an ‘income’ stream of $167 per month for 10 years. The underlying property growth is 4%. As you can see from the table above, the equity in the home (market value less loan amount), increases over time

Shared Appreciation Mortgage – is a scheme that has just been introduced into Australia, not yet targeted to the seniors market but is expected to develop towards it. It is aimed at people upgrading to a more expensive home or first home buyers. The concept is that a lender will lend some money used towards a property (between 10 to 20%) at no or a discounted interest rate in return for a share of the capital appreciation over time.

Rismark in conjunction with Adelaide bank have a product (Equity Finance Mortgage) available for some properties in the Melbourne and Sydney markets. It gives you the ability to borrow more or to have lower repayments. For this product that has a 25 year life cycle, you could borrow 20% of the value of your house in return to paying 40% of any capital appreciation over that period.

Home Reversion Scheme – the first two products were mortgages, where a lender took out a mortgage over your property and their name was on the title as a mortgagor. The title itself remained in your name. The HRS is a real estate sale product, where you sell part or all of your house to a company at a discounted price (usually between 35 to 65% of what you house is worth) but you have the right to keep living in your home until you die or decide to move out

Money for Living was a home reversion scheme, which had an unfortunate end for many seniors when the company could not sustain itself. That does not mean the scheme itself doesn’t work, it just means care and diligence needs to be taken on which company you deal with.

The Bendigo Bank venture with Homesafe Solutions is a variety of this concept and contains elements of the SAM with some safeguards built in. In essence it is a deferred sale where you sell up to 65% share of your property in return for a cash advance. The cash advance will depend on your age and value of your property, the younger you are, the lower the cash advance will be. In a sense, it is not dissimilar to a reverse mortgage but worked out from an expected end result.

In a simple illustration, a percentage of the home is sold to Homesafe in return for a cash payment. When the home is sold in the future, Homesafe receives its agreed share. If the home is worth more, all parties benefit by that growth.

As you can see above, there is not any necessarily one answer nor is there the ‘best’ solution. It will depend on your circumstances and what your needs are. Assuming you qualify for all three products, then it may get down to personal choice and what your view is of the future property market growth

As a founding member of Fortus, a national association of qualified equity release specialists, my aim is to provide consumers with reliable, accurate, unbiased and up-to-date information about the available alternatives in accessing (unlocking) residential home equity. This includes looking at all the options. If you have an existing income stream, there are additional options for some seniors who want to invest into the residential property market.

Give me a call to find out whether this type of product would work for you and what you could borrow. We will work with you to structure a solution that suits your needs and circumstances. We take the approach of looking at your long term goals and working to find a solution through finance for you. This appointment is no-cost and is obligation free, call – 03 9397 7275