Reverse mortgages can help older Australians stay in their homes but they risk being unable to pay for their future financial needs, particularly if interest rates rise or property price growth slows.
Borrowers have a poor understanding of the risks and future costs of a reverse mortgage and generally fail to consider how their loan could impact their ability to afford their possible future needs, a review found.
The Australian Securities and Investments Commission found reverse mortgages can help older people improve their standard of living in retirement while remaining in their homes, but warned there can be long-term risks.
Legal protections introduced in 2012 mean borrowers taking out reverse mortgages can never owe the bank more than the value of their property and can remain in their home until they die or decide to move out.
But ASIC said borrowers still face a risk of being left with insufficient equity in their homes to pay for their future financial needs.
Its analysis indicated a substantial proportion of borrowers may be at risk of being left with substantially less home equity if the interest rate on their loan rises or if property prices grow more slowly than expected.
Poor awareness of the risk can lead borrowers to take out a larger reverse mortgage or to withdraw money more quickly from a line-of-credit facility in the loan, ASIC’s report released on Tuesday said.
“The interest charges that accrue over time can reduce the capacity of these borrowers to afford important future expenses, such as aged-care accommodation, medical treatment, and day-to-day living expenses.”
Australians also have limited choices for finding a reverse mortgage, which generally have higher interest rates, application fees and transaction fees than standard home loans.
ASIC deputy chair Peter Kell said reverse mortgage products can help many Australians achieve a better quality of life in retirement.
“But our review shows that lenders and brokers need to make inquiries that would lead to a genuine conversation with customers about their possible future needs, not just a set of tick boxes on a form,” he said.
Reverse mortgages allow older Australians to borrow against the equity in their home through a loan that does not have to be repaid until a later time, typically when the borrower has left the property or died.