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Australia’s equity release market could soon see a resurgence in competition and growth after a decade of subdued activity, with the entry of new products, efficient funding and a new industry body.
Kevin Conlon (pictured above), chief executive of the newly formed Equity Release Industry Council (ERIC), said the market was on the cusp of welcoming three new start-up players to the market later in 2023.
The new players, some of which have been in development for a number of years, are due to be funded by life insurance and pension fund investors from more sizable markets such as the UK.
Conlon they would come to Australia with “innovative modern product design and deep funding”.
Formerly the CEO of SEQUAL, Conlon said the resurgence would be supported by ERIC, which would focus on engaging older Australians with the potential of living a dignified retirement by accessing the equity in their own homes.
“The equity release market is still characterised by significant consumer need in Australia,” Conlon said.
“There are many people in retirement with inadequate savings, who have considerable wealth concentrated in the family home. Research done over many decades also shows this cohort don’t want to move on from their home or the community they have lived in and know. They want to stay in place.”
Conlon said he was disappointed the local market had failed to adequately meet the needs of these consumers who might be living in “reduced circumstances” despite their housing wealth.
“While there has been a modest resurgence in activity, with some dominant brands doing a good job, there is a certain degree of complacency in the market that is holding us back from market growth and from addressing our needs as a society. We need to do better.”
Australia’s equity release market is dominated by two main players, Household Capital and Heartland Reverse Mortgages, which make up about two-thirds of the market, in addition to other players including IMB Bank and the federal government’s Home Equity Access Scheme.
However Conlon said that the local equity release market had achieved only 1.5% penetration, compared with 5% in comparable markets the UK and US, which he said reflected a level of complacency from existing players and a lack of funding innovation in the market.
He said this would change with cross-border funding and renewed industry body representation.
“Unlike in Australia, lifetime mortgages in the UK are not funded through securitised bank funding; they are funded by pension funds and large insurance companies. Many have argued, I believe correctly, that super funds are the natural home for funding reverse mortgages, not commercial banks,” Conlon said.
“The new providers are receiving support from UK-based funders – from life houses and pension funds – rather than commercial bank debt facilities. Australia is now in the position of getting the right solutions from our cross-border efforts rather than from home-grown solutions.”
As well as new funding sources, Conlon said growth in the UK happened in the presence of a strong industry body.
He said the new entrants to the Australian market had committed to becoming founding members of the new industry body ERIC, which would more effectively engage with consumers and be open to all members of the industry that were willing to step up to a higher standard of customer care beyond their basic regulatory obligations.
“There is an absence of a strong industry body in Australia that engages consumers – and that is the key to all of this,” Conlon said. ”Right now, senior Australians don’t have any other choice if they want to find out about a reverse mortgage than to ring a product provider.”
“While these providers might well be considered a useful source of information, at the end of the day they are somewhat compromised, as they are in the business of selling reverse mortgages. There is very little in the way of unbiased information to enable consumers to make informed decisions.”
The equity release market has weathered a decade of volatility in Australia. Though SEQUAL had 21 provider members prior to the GFC, including major banks, the global crisis led to funding and market commitment drying up, which particularly impacted many of the non-bank lenders in the market.
SEQUAL also closed in 2017, after the self-regulation measures and standards championed by its members were legislated by the government in 2012, including a no negative equity guarantee, as well as the provision of consumer fact sheets and illustrative loan scenarios.
Conlon said ERIC was now stepping in to re-engage consumers about equity release products. He said engagement had “fallen off a cliff” in Australia because there had been no industry body, which was leaving customers with nowhere to turn to see if the products suit them.
“We need to re-engage with the cohort that desperately needs a solution to their circumstances. While I applaud the consumer engagement effort providers are making, I think the elephant in the room is the need for an unbiased source of reliable information and a greatly expanded network of properly trained advisers.”
One of ERIC’s first initiatives will be to implement a searchable online database of equity release professionals based on post code, with a focus on those who are both trained to offer the products and have an interest in offering them, including brokers, financial advisers and lawyers.
“Trying to find a broker who knows anything or is prepared to help is like finding a needle in a haystack. My estimate is there about 150 people who are active in this market, where back in the day we had 1400 accredited. We are aiming to rebuild that,” Conlon said.
Conlon said equity release transactions were typically low dollar value and not highly remunerative for advisers or brokers, with the average loan size of about $100,000 being dwarfed by the forward mortgage market where loan sizes of $600,000 to $800,000 were common.
“You don’t see a high volume of inquiries, and there are fewer transactions. They are also highly labour intensive, as the average reverse mortgage broker will take 18 months between a first meeting and a decision to proceed, working through multiple meetings with family and friends.”
Conlon said brokers who were committed to equity release products being a solution for some clients would have the opportunity to be part of an important decision in their lives, and get closer to the adult children of these clients, who could be middle-aged, asset-rich high income earners.
“There is a real opportunity for brokers to increase their engagement with their target market simply by assisting their parents at a difficult time of life with an equity release transaction,” he said.
Conlon said that, despite criticism of the reverse mortgage market , the vast majority of borrowers were satisfied by the outcomes of their interactions with their reverse mortgage, and the level of complaints had been minimal, showing a high level of customer satisfaction.
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