Table of Contents

Reverse Mortgages in Australia 2004 - An examination of a small but growing segment of the Australian mortgage market: reverse mortgages. The briefing includes an estimate of the size of the market, benchmarks products offered and predicts how the market will develop going forward.

Product Code: BFFS0312

Publication Date: 23-Jun-2004

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Overview

Introduction

The reverse mortgage market in Australia is small. However, a number of factors including an aging population, increasing home equity and evidence that Australians have too little saved to fund retirement suggest that the market is destined to grow. How will the reverse mortgage market develop and should lenders enter this section of the mortgage market? This briefing provides the answers.

Scope

· Covers reverse mortgage products in Australia

· Includes an estimate of the size of the reverse mortgage market and of the amount of equity held by those aged 60 and over

· Based on in-depth interviews with executives working within the reverse mortgage market in Australia

Highlights

Reverse mortgages allow those who are over 65 and who own their home outright to borrow based on the equity that they have in their home. Like a regular mortgage the property serves as security for the loan. However, unlike a conventional home loan no repayments are due on a reverse mortgage during the course of the loan.

Despite their poor performance in the 1990s there is now renewed interest in reverse mortgages. This is not only because six lenders now offer the product. Rather it is because a range of other factors are conspiring to create an environment that is conducive to their development.

As the Australian market grows it will be in the interests of reverse mortgage lenders to form a representative body. This body will help build consumer awareness and understanding and maintain standards should lesser known lenders enter the market.

Reasons to Purchase

· Learn more about a small segment of the Australian mortgage market but one that is predicted to grow

· Examine what markets in the UK, the US and Canada suggest about how the Australian reverse mortgage market might develop

· Benchmark competitors in the reverse mortgage market

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CHAPTER 1 INTRODUCTION	8
What is this briefing about?	8
Who is the target reader?	9
Scope	9
CHAPTER 2 MARKET CONTEXT	10
Reverse mortgages explained	10
The target audience is those 60 and over who own their own home	11
Reverse mortgages are based on the premise that house prices will continue to rise	11
Reverse mortgages carry a no-negative equity guarantee	12
Centrelink offers a version of a reverse mortgage, the Pension Loan Scheme	13
The history of reverse mortgages in Australia	13
The Money for Living Loan, the first reverse mortgage in Australia	13
Other players tried and failed in the 1990s	14
Renewed interest in reverse mortgages	14
Availability of reverse mortgages has improved	14
Rapidly rising property prices mean that homeowners have more equity in their homes	15
Property is more commonly being seen as a retirement vehicle	16
The retirement savings gap will drive retirees towards reverse mortgages	17
70 per cent of Australians currently aged between 50 and 69 will retire on less than AUS$320 per week	17
Reverse mortgages may affect an individual's pension entitlement	19
Demographic trends suggest higher demand for reverse mortgages in the years ahead	19
Older people now have higher expectations about their quality of life	19
Aged organizations are raising the profile of reverse mortgages	20
Consumer awareness of reverse mortgages is growing	20
Consumer attitudes towards property and inheritance are changing	21
Sizing the reverse mortgage market	21
Estimating the current size of the reverse mortgage market	21
Estimating the amount of equity held by homeowners aged 60 and over	22
Reverse mortgages abroad	23
Reverse mortgages in the UK	23
Growing in popularity but a storied history	25
The market has now cleaned up its image	25
The UK equity release market has grown rapidly	26
Norwich Union is the leading player in the UK market	26
Northern Rock offers lump sum and regular payment products	27
For more information....	27
Reverse mortgages in the US	27
Home Equity Conversion Mortgages (HECMs)	27
Fannie Mae Home Keeper products	28
The Financial Freedom Cash Account	28
US reverse mortgage borrowers have to receive counselling	29
The US market has grown significantly and is expected to grow further	29
Reverse mortgages in Canada	30
The Canadian Home Income Plan (CHIP)	30
Lessons for the Australian market	30
Conclusion	31
CHAPTER 3 COMPETITIVE DYNAMICS	32
Bluestone Mortgages	32
Equitytap	32
Equitytap has unique features	33
The opinion of Datamonitor's financial services team	34
Commonwealth Bank	35
The Equity Unlock Loan for Seniors	35
Commonwealth Bank targets equity in other ways	35
The opinion of Datamonitor's financial services team	36
HomeStart Finance	36
Seniors Equity Loan	37
The opinion of Datamonitor's financial services team	38
Police and Nurses Credit Society	39
Easy Living Access Loan	39
The opinion of Datamonitor's financial services team	40
StateWest Credit Society	40
The Reverse Equity Loan	41
The opinion of Datamonitor's financial services team	42
St George	42
The Seniors Access Home Loan	42
The opinion of Datamonitor's financial services team	44
Conclusion	44
CHAPTER 4 FUTURE DECODED	46
The future development of the reverse mortgage market	46
Future market drivers	46
Interest in retirement incomes will remain strong	46
The performance of the property market will influence the fortunes of the reverse mortgage market	47
More people retiring with debts should drive the reverse mortgage market	47
Greater competition in the reverse mortgage market is inevitable	47
Further entry by non-bank players is on the cards	48
Marketing efforts will be intensified	48
Marketing and education efforts can be integrated	49
Effective self-regulation must continue	49
Australian lenders should form a body similar to SHIP in the UK	50
Reverse mortgage product developments	50
There is scope for greater flexibility in the reverse mortgage market	50
Shared appreciation mortgages and home reversion plans will not catch on in Australia	51
Unique consumer segments should be targeted	51
Borrowers should be allowed to secure their loans on investment properties	52
Conclusion	52
CHAPTER 5 APPENDIX	54
Definitions	54
Reverse mortgage	54
Lending commitments	54
Low-doc mortgage loans	54
Future readings	54
Relevant links	55
Datamonitor's custom research capabilities	55
SPP writing team	57
How to contact experts in your industry	57
List of Tables
Table 1: The cost of a comfortable retirement according the Association of Superannuation Funds of Australia (ASFA)	18
Table 2: Home equity held by those 60 and over, 65 and over and 75 and over, 2003	23
Table 3: Maximum loan to value ratios on the Bluestone Equitytap product by age group	33
Table 4: The Bluestone Equitytap product	34
Table 5: The Commonwealth Bank Equity Unlock Loan for Seniors	36
Table 6: The HomeStart Finance Seniors Equity Loan - Option 2	38
Table 7: The Police and Nurses Credit Society Easy Living Access Loan	40
Table 8: The StateWest Reverse Equity Loan	41
Table 9: The lending criteria on the St George Seniors Access Home Loan	43
Table 10: The St George Seniors Access Home Loan	44
List of Figures
Figure 1: Graphic highlighting how the amount outstanding changes on a reverse mortgage compared to a regular mortgage product	11
Figure 2: A graphic illustrating how a borrower's equity can change once they have taken out a reverse mortgage	12
Figure 3: At the end of 2003 the Australian house price index for an established house reached 245 index points	16
Figure 4: Lending commitments for the purchase or construction of investment properties amounted to AUS$74.6 billion in 2003	17
Figure 5: Reverse mortgages are one of a number of equity release products offered in the UK market	24
Figure 6: The Safe Home Income Plans (SHIP) code of practice	26
Figure 7: Datamonitor's core consulting capabilities	56

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