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Reverse mortgages are on the rise in Australia and could provide added opportunities for brokers.
This type of specialty lending offers older (often cash-strapped) homeowners the chance to borrow money against the equity of their homes. That equity is used as a security in the loan.
Reverse mortgage services, once considered niche, have become increasingly common since the Australian federal government's version – also known as the Home Equity Access Scheme, or HEAS – underwent revisions in 2019, making them more widely available. Add to that Australia's aging demographics, coupled with a cost of living crisis that is making it harder to make ends meet, and it's not hard to see why the products are in demand.
"A large portion of the population, the Baby Boomers, are reaching retirement age and they have a lot of their wealth tied up in their homes," Brenden Lowbridge (pictured above left), managing director and mortgage broker at Newcastle, Australia-based Money Links, told Australian Broker. "They need to unlock that equity."
Historically, retirees without added savings had the option to move to a smaller home, or take out a short-term loan with a lower interest rate. But those smaller loans require repayments and some sort of income to pay them back.
But, as Andrew Rennie (pictured above centre), a broker Helping Hand Finance said, "Not everyone is physically able to work in retirement."
Hence the appeal of the reverse mortgage. Melbourne-based Rennie said he gets inquiries from clients all the time, all over the country, about the product.
And the numbers back him up. The government-funded HEAS had more than 12,000 participants at the start of 2024, up from approximately 9,700 in 2023, according to Australia's Department of Social Services. There are also borrowers going to commercial lenders, many of which have reported increased demand for reverse mortgages. New Zealand-based Heartland Group said it had a 20% rise in reverse mortgages for the first half of 2024. Gateway Bank said its reverse mortgage business grew 81%, year-over-year, in 2024, or the 12 months ending in June 2024.
That's a lot of opportunities for brokers to cash in on the market — and the demand doesn't seem to be slowing down anytime soon.
"People are living longer and have exhausted their superannuation fund and have no income, but they're sitting on this house that's worth millions of dollars," said Andrew Dihm (pictured above right), senior credit adviser at independent brokerage firm Flint. Like the 80-something clients who own a $6 million home, but no incoming funds.
Reverse mortgages provide other opportunities too for those who don't want to move out of their home, such as money to renovate, travel or for aging parents to put a large chunk of cash in the hands of their adult children who want to make a downpayment on a house of their own, Dihm said. His firm expects reverse mortgages to grow 7.4% annually over the next five years.
Not every bank or lender offers reverse mortgages. In fact, Australia's four big banks don't offer the product, so borrowers need to seek out smaller banks or non-bank lenders for the loan. Some lenders include Heartland, Gateway Bank, P&N Bank, Australian Seniors Advisory Group, IMB Bank and G&C Bank.
The age of entry depends on the lender, as do interest rates. The government-funded Home Equity Access Scheme offers the lowest rates at 3.95%. But there are a number of restrictions, including that the loan must be paid back and the size of the loan, which caps at 150% of the borrowers' pension value.
"The HEAS is a good option if you only want to borrow a little bit of money," said Rennie.
For those who want to take out a larger loan, commercial reverse mortgages have fewer restrictions. But interest rates can be as much as 10% on a compounding annual basis. Additionally, borrowers are not required to pay back the loan until the last borrower leaves the home, either by way of selling the home or passing away.
There are a number of other requirements for all borrowers. Most notably, the property has to be mortgage free. That means if a borrower has a balance on an existing mortgage, they have to use that lump sum from the reverse mortgage to pay it off first, and can then use the rest for living expenses.
The lender ultimately determines the amount of the reverse mortgage based on a number of factors, including the youngest borrower's age, but it could be as high as 20% of the value of the home. That means a reverse mortgage loan on a property worth $2 million has the potential to offer a 60-year-old borrower $400,000 in cash, $600,000 for a 70 year old, and so on.
"For that reason, it's a very unique product. The loans are structured based on age," said Lowbridge.
The implications of the reverse mortgage scheme have been controversial, so brokers and borrowers need to be aware of the potential downsides.
First and foremost, since no repayment is required on commercial loans, adult children or other family members expecting to inherit property once the borrower passes away, might be surprised to find that more is owed on the home than expected. Or that they have to take out a new mortgage to pay off the reverse mortgage.
This can cause further problems if home prices in a given area haven't risen faster than the interest rates on the reverse mortgage – which are higher than normal and compound yearly, slowly eating into the equity accrued over time.
That means, if a 60 year old took out a mortgage and lives another 30 or 40 years, the principal plus 10% interest can be "crazy expensive," said Darren Coff, managing director at brokerage firm Investure.
"It gives people cash flow, but the amount of cost is eye-watering," he said. "What happens when you use up the loan?"
For these reasons, the Gold Coast-based broker said he tends to avoid reverse mortgages "at all costs," instead opting for alternatives.
"I'm not saying reverse mortgages are not an opportunity. There's money to be made," Coff said. "But there are some dangers to that product and too many detrimental things could happen."
Lowbridge agreed that reverse mortgages are not for everyone. "They're very niche. If used correctly, they could fill a void," he said. "Some retirees are ready and willing to downsize. But others don't want to sell their house and move. So it's a needed product for that reason."
