REP 586 - Review of reverse mortgage lending in Australia

REPORT 586

Review of reverse mortgage

lending in Australia

ugust 2018

About this report

This report summarises the findings and recommendations from ASIC’s

review of lending practices for reverse mortgages.

Reverse mortgages can play an important role in helping older Australians

improve their standard of living in retirement while remaining in their homes.

Our review found that reverse mortgages are playing this role, but that

lenders can do more to improve long-term consumer outcomes and help

potential borrowers make informed decisions about their immediate and

future financial needs.

REPORT 586: Review of reverse mortgage lending in Australia

About ASIC regulatory documents

In administering legislation ASIC issues the following types of regulatory

documents.

Consultation papers: seek feedback from stakeholders on matters ASIC

is considering, such as proposed relief or proposed regulatory guidance.

Regulatory guides: give guidance to regulated entities by:

 explaining when and how ASIC will exercise specific powers under

legislation (primarily the Corporations Act)

 explaining how ASIC interprets the law

 describing the principles underlying ASIC’s approach

 giving practical guidance (e.g. describing the steps of a process such

as applying for a licence or giving practical examples of how

regulated entities may decide to meet their obligations).

Information sheets: provide concise guidance on a specific process or

compliance issue or an overview of detailed guidance.

Reports: describe ASIC compliance or relief activity or the results of a

research project.

Disclaimer

This report does not constitute legal advice. We encourage you to seek your

own professional advice to find out how the Corporations Act and other

applicable laws apply to you, as it is your responsibility to determine your

obligations.

Examples in this report are purely for illustration; they are not exhaustive and

are not intended to impose or imply particular rules or requirements.

REPORT 586: Review of reverse mortgage lending in Australia

Contents

Executive summary ................................................................................. 4

An increasing role for equity release products .................................. 5

The enhanced consumer protections ................................................ 6

Summary of findings .......................................................................... 8

Further action ................................................................................... 17

A The reverse mortgage lending market ........................................ 19

Features and risks of a reverse mortgage ....................................... 19

Market, borrower and loan characteristics ....................................... 24

B Finding 1: Helping borrowers meet immediate objectives ........ 30

Immediate loan outcomes ................................................................ 30

Perceived lack of alternative choices .............................................. 32

C Finding 2: The ‘no negative equity guarantee’ ........................... 36

Purpose of the guarantee ................................................................ 36

Outcomes of the guarantee ............................................................. 36

D Finding 3: The risk of equity erosion ........................................... 39

Borrower outlook and perceptions ................................................... 39

Lenders’ obligation to inquire about requirements and objectives .. 41

Borrowing trends .............................................................................. 46

Analysis of loan data ........................................................................ 46

E Finding 4: Market concentration and competition ....................... 51

Market concentration ....................................................................... 51

Barriers to entry ............................................................................... 53

Switching costs for consumers ........................................................ 53

F Finding 5: Reducing the risk of financial elder abuse ............... 54

What is elder abuse? ....................................................................... 54

The need for adequate safeguards ................................................. 55

G Finding 6: Protecting other residents in the home .................... 57

Limitations of the tenancy protection warning ................................. 57

The need for tenancy protection ...................................................... 58

H Finding 7: Unfair contract terms .................................................. 60

Potentially unfair terms .................................................................... 60

I Other issues ................................................................................... 64

Borrower understanding of the product ........................................... 64

Implications for income and financial capacity ................................ 67

Finding help ..................................................................................... 71

Appendix 1: Methodology .................................................................... 73

Scope of our review ......................................................................... 73

What the review involved ................................................................. 74

Appendix 2: Regulation in other jurisdictions ................................... 81

Appendix 3: Accessible versions of figures ....................................... 83

Key terms ............................................................................................... 90

Related information ............................................................................... 93

REPORT 586: Review of reverse mortgage lending in Australia

Executive summary

1 Reverse mortgages allow older Australians to borrow against the equity in

their home through a loan that does not require repayment until a later time,

typically when the borrower has vacated the property or passed away.

2 These products are one of the main options available to older Australians

who want to draw on the equity in their home while continuing to live in

their property. Research suggests that 83% of older Australians strongly

prefer to ‘age in place’.

Note: See the Treasury, 2015 Intergenerational report (March 2015).

3 In mid-2017, ASIC commenced a review of lending for reverse mortgages.

The aim of our review was to examine this market after the introduction in

2012 of enhanced responsible lending obligations and consumer protections

for reverse mortgages (enhanced consumer protections): see paragraphs

14–16.

Note: For a full summary of responsible lending obligations and protections under the

National Consumer Credit Protection Act 2009 (National Credit Act), see Section D of

the report.

Our review looked at reverse mortgage lending from 2013–17, drawing on

quantitative and qualitative data to understand how this market is working in

practice. This included granular data on over 17,000 reverse mortgages,

111 consumer loan files, the policies and procedures of lenders in our review,

and complaints from internal dispute resolution (IDR) and external dispute

resolution (EDR) databases. We also commissioned in-depth interviews with

30 borrowers and consulted over 30 industry and consumer stakeholders.

Note: For a detailed methodology, see Appendix 1 of the report.

For our review, we assessed five groups of lending brands separately, each

of which are referred to in this report as a ‘lender’:

(a) Bankwest;

(b) Commonwealth Bank;

(d) Macquarie Bank; and

(e) the Westpac brands comprising St George Bank, the Bank of

Melbourne and BankSA.

6 This review forms part of ASIC’s broader work to address key issues that

affect older Australians and to help bring about positive changes for these

consumers in credit and financial services: see Report 550

ASIC’s work for

older Australians (REP 550).

REPORT 586: Review of reverse mortgage lending in Australia

7 Our broader work on these issues is consistent with growing efforts by the

Australian Government and the state governments to address issues relating

to Australia’s ageing population.

8 In May 2018, the Australian Government announced a package of reforms as

part of the 2018–19 Federal Budget to support the skills, finance, health and

safety of older Australians. This includes plans to expand the Pension Loans

Scheme, the establishment of an independent Aged Care Quality and Safety

Commission, improvements to the My Aged Care website, and a number of

financial measures and incentives.

Note: See Australian Government, Fact Sheet 1: More choices for a longer life package

overview (May 2018).

9 The Productivity Commission has released various studies on issues relating

to older Australians, including aged care, the economic implications of an

ageing Australia, and housing. The Australian Government has also

commenced a 10-year program of reforms to improve the sustainability and

affordability of the aged care system.

Note: See Productivity Commission, Housing decisions of older Australians (December

2015) (Productivity Commission report); Productivity Commission, Caring for older

Australians draft report (January 2011); Productivity Commission, Economic

implications of an ageing Australia (April 2015); Department of Health, Legislated

review of aged care (September 2017) (PDF, 2.87 MB).

An increasing role for equity release products

10 The population of older Australians is growing at an increasing rate. From

2014 to 2054, the number of people in Australia between 65 and 84 years of

age is likely to more than double (increasing by over 4 million, from 3.1

million in 2014 to 7.0 million), and the number of people over 85 years is

expected to more than quadruple.

Note: See the Treasury, 2015 Intergenerational report (March 2015).

11 These trends will affect demand for equity release products. More than $500

billion of Australia’s home equity is held by consumers aged over 65, and

about 70% of Australians aged 55–85 own their home outright. In 2014, only

62% of couples and 38% of single people were on track to reach a

comfortable retirement income.

Note: Productivity Commission report, p. 145; Deloitte Australia, Deloitte Australian

mortgage report 2018 (Deloitte report); University of Melbourne and Towers

Watson, View: Retirement adequacy—Are we making progress? (August 2016).

12 While consumer demand for reverse mortgages has risen gradually since the

2008 global financial crisis, most consumers still have negative overall

perceptions about equity release products such as reverse mortgages.

REPORT 586: Review of reverse mortgage lending in Australia

‘A common view amongst retirees—and even many finance brokers and

lenders—tends to be that equity release products take advantage of

vulnerable elderly people, or that they are often used by family members

to do so.’

Note: See Productivity Commission report, p. 154. See also ASIC, Managing change in

retirement: Related financial issues and implications, September 2017.

13 Despite this, the Productivity Commission report has noted that the family

home remains an untapped source of retirement income.

‘Most older Australian home owners on low incomes could achieve

a modest retirement living standard over the remainder of their lives

by drawing on their home equity.’

Note: See Productivity Commission report, p. 2.

The enhanced consumer protections

14 In 2012, the Australian Government introduced the enhanced consumer

protections to help consumers make more informed choices about reverse

mortgages and protect them from potential harm: see Table 1.

15 These measures were introduced to address the unique nature of reverse

mortgages compared with other types of credit contracts: the product is

marketed exclusively towards older Australians who are at or approaching

retirement age, repayments are not required until specified events occur, the

long-term effect of the loan is difficult to predict, and, before these

protections, borrowers (or their dependents) might have been required to

repay more than the value of their secured property at the end of the loan.

Note: See Explanatory Memorandum, Consumer Credit and Corporations Legislation

Amendment (Enhancements) Bill 2011 (Enhancements Bill), pp. 3 and 32–33.

16 Our consumer research indicated that while consumers generally could not

recall some of the mandatory disclosure documents that credit licensees are

required to give consumers, the no negative equity guarantee has reduced

risks to consumers. However, more can be done to achieve the intended

objectives of these measures.

REPORT 586: Review of reverse mortgage lending in Australia

Table 1: Overview of the enhanced consumer protections

Issue

Summary of protection

Responsible

lending

Licensees must inquire about the possible future needs of

potential borrowers, which includes but is not limited to

their needs for aged care and leaving equity to their estate.

Note: See reg 28HA, National Consumer Credit Protection

Regulations (National Credit Regulations).

Proposed loans with a loan-to-valuation ratio (LVR) above

prescribed percentages are presumed to be unsuitable.

Note: See s93A, National Credit Code (Sch 1 of the National

Credit Act) and reg 28LC, National Credit Regulations.

The ‘no negative

equity guarantee’

(NNEG)

Borrowers cannot owe more than the market value of their

secured property when it is sold. Lenders must return any

amount paid in excess of the market value.

Note: See Pt 5, Subdiv 1-A, National Credit Code.

Mandatory

disclosures

Licensees must give borrowers:

 projections of home equity taken from the reverse

mortgage calculator on ASIC’s MoneySmart website;

 an information statement;

 a tenancy protection warning; and

 annual account statements.

Note: See s133DB and 133D, National Credit Act and s18B,

National Credit Code.

Enforcing a reverse

mortgage

Reverse mortgage credit contracts must not provide that

certain events will be a basis to start enforcement

proceedings, such as a borrower failing to inform a lender

that another person occupies the property.

Note: See s133DB and 133D, National Credit Act and s18B,

National Credit Code.

Enforcement proceedings must not be commenced unless

the lender has spoken to the borrower by telephone or in

person about the default notice and the consequences of

failing to remedy the default.

Note: See s88(1)(d) and 88(2)(d), National Credit Code.

REPORT 586: Review of reverse mortgage lending in Australia

Summary of findings

Finding 1: Reverse mortgages helped older Australians

achieve their immediate financial objectives

17 Each of the 30 borrowers in our consumer research indicated that their

reverse mortgage enabled them to achieve their original objectives for the

loan. Borrowers reported that one or more unforeseen events (e.g. divorce,

losses in superannuation, poor health, early retirement and higher costs of

living) had driven them to consider a reverse mortgage.

18 Our loan file review also identified several loans for borrowers who showed

indicators of financial need before taking out the loan.

Case study 1: A loan for day-to-day expenses

Jenny was 74 years old and living solely on a pension. Her loan documents

indicated that she had only $664 in her transaction account and $15,260 of

credit card debt when she applied for a reverse mortgage.

The documents stated that she took out a $50,000 reverse mortgage to

refinance her credit card debt, make home improvements, and cover day-

to-day living expenses.

19 The consumer research indicated that reverse mortgages enabled borrowers to:

(a) maintain their current living arrangements with less financial stress;

(b) obtain short-term finance;

(d) afford a better quality of life.

Case study 2: Extra money for a better quality of life

Caroline moved to her current home to be close to her children, but found

her pension did not allow her to spend time with them or go on holidays.

‘I thought why should I sit here and twiddle my thumbs when I’ve only

a few years left, so I arranged for some extra money to allow me to

just enjoy my time.’

20 Each of these borrowers reported believing that a reverse mortgage had been

their ‘only option’ for achieving their immediate financial objectives. A

strong emotional attachment to the home and a desire to continue ageing in

place was frequently cited as a significant priority, which ruled out

downsizing as an alternative option.

‘It’s a big stretch to say just uproot everything and move up North [to

Queensland]. While I might have family there, they have their own lives

and friends and I’d have nothing and no one familiar so I’d just be sitting in

an apartment by myself staring at the wall.’

REPORT 586: Review of reverse mortgage lending in Australia

Finding 2: The enhanced consumer protections have

eliminated the risk of negative equity

21 Before the introduction of a ‘no negative equity guarantee’ (NNEG),

borrowers faced a risk of eventually owing more on their loan than they

could recover from selling the secured property. Because this risk was borne

entirely by borrowers, the Australian Government observed that, in the

absence of the NNEG, lenders can be ‘less conservative in their lending

practices and more aggressive in enforcement actions’.

Note: See Explanatory Memorandum, Enhancements Bill, p. 206.

22 The NNEG was introduced to protect borrowers from this risk by preventing

lenders from receiving more from the loan than the market value of the

secured property. This means that borrowers can continue living in their home

without any risk of being unable to pay off the loan balance when they sell it.

23 Our findings suggest that the intended objectives of the NNEG have been

achieved. During the period we reviewed, lenders imposed limits on the

maximum LVR of new loans. These limits were more conservative than the

rebuttable LVRs that are prescribed in the enhanced consumer protections,

and limited the interest charges that could accrue to new loans.

24 As a result, our data analysis suggests that only two out of 15,053 loans are

likely to reach a loan balance that exceeds the market value of the secured

property by the time the borrower reaches 84 years of age, assuming that interest

rates on these loans stay the same and property prices rise by 3% per annum.

25 Our data analysis also indicated that the NNEG may protect a small minority

of borrowers if interest rates rise substantially, if residential property prices

do not grow (or fall), or if a combination of these events occur. For example,

if the interest rate on all the reverse mortgages in our review rise by 3%, and

property prices stay the same, then 6% of borrowers are likely to benefit

from the NNEG by the time they are 84 years old.

Finding 3: Some borrowers may not recognise the impact

of equity erosion on their possible future needs

26 Despite the introduction of the NNEG, borrowers still faced a risk of being

left with insufficient equity in their homes to pay for their future financial

needs. In particular, our data analysis indicated that 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.

27 For example, we tested a fixed amount of equity that a borrower might

require when they reach the age of 84, the average age of entering into aged

care. Figure 1 illustrates how fewer borrowers will have at least $200,000 of

remaining home equity by age 84, if one or both of these events occur.

REPORT 586: Review of reverse mortgage lending in Australia

Figure 1: Percentage of borrowers with at least $200,000 of remaining

home equity by age 84, if economic conditions change

Note: See Table 18 in Appendix 3 of the report for the underlying data shown in this figure

(accessible version).

28 Figure 2 illustrates that even fewer borrowers will have at least $380,000,

which is the average self-funded upfront cost of aged care for one person.

Figure 2: Percentage of borrowers with at least $380,000 of remaining

home equity by age 84, if economic conditions change

Note: See Table 19 in Appendix 3 of the report for the underlying data shown in this figure

(accessible version).

29 Poor awareness of this risk can lead borrowers to take out a larger reverse

mortgage, or to withdraw money more quickly from a line-of-credit facility in

a reverse mortgage. 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.

96%

90%

74%

53%

Scenario 1 Scenario 2 Scenario 3 Scenario 4

property

prices

rise 3% p.a.

interest rates

stay the same

property

prices

rise 3% p.a.

interest rates

rise by 3%

property

prices

stay the same

interest rates

stay the same

property

prices

stay the same

interest rates

rise by 3%

67%

53%

34%

24%

Scenario 1 Scenario 2 Scenario 3 Scenario 4

property

prices

rise 3% p.a.

interest rates

stay the same

property

prices

rise 3% p.a.

interest rates

rise by 3%

property

prices

stay the same

interest rates

stay the same

property

prices

stay the same

interest rates

rise by 3%

REPORT 586: Review of reverse mortgage lending in Australia

30 This is concerning because our data analysis indicates that borrowers tended

to apply for the maximum credit limit that had been permitted by their

lender, as illustrated in Figure 3. Most borrowers in our consumer research

reported that they had been happy to accept whatever loan amount they were

offered, and some borrowers reported that their broker or lender had

recommended applying for the maximum possible credit limit.

Note: Some borrowers may have applied for the maximum credit limit due to the

conservative loan limits introduced by lenders in response to the NNEG. Some lenders

occasionally exceeded these credit limits on an exceptional case-by-case basis.

Figure 3: Credit limit as a percentage of the maximum permitted loan size (by loan type)

Note: See Table 20 in Appendix 3 of the report for the underlying data shown in this figure (accessible version).

31 This lack of long-term planning can particularly affect younger borrowers

who are more likely to remain in their home for longer before discharging

their loan.

32 When we asked borrowers about how their decision to take out a reverse

mortgage might affect their long-term financial situation, many indicated

that they had not seriously considered their possible future needs. Our loan

file review also suggested that most borrowers had not considered the long-

term implications of taking out a reverse mortgage.

33 The borrowers in our consumer research did not express any concern that the

compound interest on their reverse mortgage could make it more difficult for

them to afford future expenses after their loan is paid off.

Note: This behaviour is consistent with our previous findings in REP 537 that only

32% of borrowers have a financial plan for the next 10–15 years: see Report 537

Building seniors’ financial capability (REP 537) at p. 14.

10%

20%

30%

40%

50%

60% 65% 70% 75% 80% 85% 90% 95% 100% 105% 110%

Percentage of loans of the specified type

Credit limit as a percentage of the maximum permitted LVR

Lump sum Line of credit

Income stream Combination

REPORT 586: Review of reverse mortgage lending in Australia

34 Licensees are required to take reasonable steps to inquire into a borrower’s

future needs and objectives. This additional requirement is imposed because

the effect of compound interest and the potential impact of a reverse

mortgage on a borrower’s ability to afford future expenses can be

significant. If a proposed loan makes it difficult for them to meet their long-

term needs, the loan may be unsuitable.

35 Our loan file review indicated that the application processes of all five

lenders focused primarily on the borrower’s short-term objectives, while

limited or no attention was paid to their possible future needs. Inquiries

made by licensees lacked sufficient detail and followed a ‘tick-box’ formula.

Lenders also did not document any inquiries about whether borrowers had a

short-term exit strategy or intended to remain in the loan indefinitely.

36 Approximately 92% of the loan files we reviewed did not record the possible

future needs of the borrower in sufficient detail and contained no evidence

that the broker or lender had discussed how a loan may affect the borrower’s

ability to afford possible future needs.

37 Licensees have an important role to play in ensuring that potential reverse

mortgages are not unsuitable, particularly since borrowers also faced

obstacles to receiving independent professional guidance about these risks.

Our consultations with lenders and industry bodies representing brokers,

financial advisers, accountants, legal practitioners and financial counsellors

found that these professionals (referred to in this report as ‘guidance

providers’) had been reluctant to give guidance about reverse mortgages.

38 This reluctance was attributable to negative perceptions about the product,

limited awareness about the product, and a desire to avoid the perceived risk

of providing unlicensed credit assistance by recommending the product.

Comprehensive financial advice can also cost $2,500–3,500, which can be

too expensive for some borrowers, especially those who are already showing

indicators of financial need.

Note: See Report 224 Access to financial advice in Australia (REP 224).

39 Under the enhanced consumer protections, licensees must give potential

borrowers a printed copy of projections that illustrate the possible effect of a

reverse mortgage on the equity that a borrower will have in their home. Our

loan file review indicated that some licensees could have done more to

match the default assumptions in these projections to suit the specific

circumstances of each potential loan. We recognise that our guidance will

need to be updated to reflect this finding.

Note: See Information Sheet 185 Using ASIC’s reverse mortgage calculator

(INFO 185).

REPORT 586: Review of reverse mortgage lending in Australia

Finding 4: Options for borrowers were limited due to a lack

of competition

40 Our data analysis indicated that the market for reverse mortgages is highly

concentrated. Application fees, transaction fees and interest rates for reverse

mortgages were generally higher than for other types of consumer credit,

such as standard home loans.

Case study 3: Reverse mortgages and standard home loans

In 2017, one lender in our review charged a $950 establishment fee and a

$12 monthly service fee for a reverse mortgage, compared to a $600

establishment fee and a $8 monthly service fee for a standard home loan.

The interest rate on this product was also higher than the variable rate for

an interest-only home loan.

41 Few alternatives to a reverse mortgage are available for older Australians

who would like to draw on the equity in their home while continuing to live

there. Lenders and other industry participants cited more intensive capital

adequacy requirements, longevity risk, limited access to wholesale funding

and low interest rates as reasons why many new lenders are unlikely to offer

a reverse mortgage or other equity release product in the near future.

42 In the 2018–19 Federal Budget, the Australian Government announced that

it will extend the current Pension Loans Scheme. Those on a full or part age

pension and eligible self-funded retirees will be able to use home equity to

receive a fortnightly payment (including age pension payment) of 150% of

the maximum age pension. These loans are offered at a lower interest rate

(currently 5.25%) compared to commercially available reverse mortgages,

but can only be accessed as an income stream.

43 We note that new types of equity release products, such as fractional equity

release products, are also emerging in this market, but these products may

also have risks such as the reduction of equity over time.

Finding 5: Lenders have a role in reducing the risk of

financial elder abuse

Financial elder abuse occurs when one person illegally or improperly

exploits or uses the money or resources of an older consumer. Borrowers

were on average 75 years old when they took out a reverse mortgage, which

can place them at high risk for financial elder abuse.

45 Our loan file review identified 15 loan applications where a lender could have

detected a sign of possible financial elder abuse and made further inquiries to

identify whether abuse may have been occurring.

REPORT 586: Review of reverse mortgage lending in Australia

46 Possible signs included:

(a) repayment on a loan being made by an adult child;

(b) money transferred to a non-borrower;

(d) the involvement of children in the application;

(e) only non-borrowers receiving mandatory independent advice; and

(f) file notes indicating abuse by a sibling of the borrower.

Case study 4: Loan application initiated by family member

John, aged 86, took out a $50,000 reverse mortgage. He had a power of

attorney established in August 2015, two months before his reverse

mortgage was approved in October 2015.

The lender required borrowers to obtain independent legal advice and the

declaration for this advice was signed by John’s grandson. Another

grandson who was a financial adviser signed the independent financial

advice declaration.

47 However, in each loan where we detected a sign of possible financial elder

abuse, we found no documented evidence that the lender had made or

documented any further inquiries into whether the borrower may have been

taken advantage of by a caregiver or family member.

48 Although our review identified a potential risk of financial elder abuse, our

review of the loan files identified no evidence of actual financial elder abuse.

49 Industry bodies are recognising the significant role that licensees should play

in reducing the risk of financial elder abuse. The Australian Law Reform

Commission (ALRC) has highlighted that financial institutions are in a ‘good

position to detect and prevent the financial abuse of their older and at-risk

customers’. The Australian Banking Association (ABA) has issued a revised

Banking Code of Practice that commits members to take ‘extra care’ with

vulnerable customers who are experiencing elder abuse or financial abuse.

Note: See ALRC, Report 131, Elder abuse: A national legal response (June 2017),

p. 299. See also ABA, Banking Code of Practice (issued July 2018).

Finding 6: Some loans might not protect other residents in

the home

50 If the borrower vacates the property or passes away, borrowers or their estate

can often only afford to pay off the loan balance of a reverse mortgage by

selling the secured property. This can require non-borrowers still living in

the home (non-borrower residents) to move out unless the contract contains a

‘tenancy protection’ provision allowing them to remain in the home for a

period of time.

REPORT 586: Review of reverse mortgage lending in Australia

Case study 5: No tenancy protection for non-borrower spouse

Married couple Ali and Brenda lived in their own home, but had few other

assets besides a car and caravan valued at $18,000 and negligible savings.

Their only income was the age pension.

Ali took out a reverse mortgage for $30,0000 against the family home. The

loan was only in his name and did not contain a tenancy protection

provision for Brenda.

If Ali passed away or needed to move to aged care, it is likely that the

reverse mortgage could only be paid off by selling the property and Brenda

would need move out and find a new home.

51 Only one lender in our review offered consumers a limited option to include

a tenancy protection provision in their loan contract. This protection lasted

for one year after the death of the borrower, the lender could refuse an

application seeking tenancy protection, and the nominated non-borrower

resident had to be a relative of the borrower and over 70 years old at the time

of the application.

52 Borrowers with the other four lenders in our review could protect non-

borrower residents only by adding their name to the loan contract.

53 If one or more potential borrowers want to protect the ability of a specified

person to continue living on the property even after the borrowers have

vacated the home, in some cases a proposed reverse mortgage may be

unsuitable if it will endanger the tenancy of that specified person.

54 In 42% of loan files we reviewed, the lender failed to document any inquiries

about the suitability of a proposed loan that lacked tenancy protection, where at

least one non-borrower resident lived in the home when the loan was taken out.

55 Under the enhanced consumer protections, lenders must give potential

borrowers a prescribed tenancy protection warning if the loan does not include a

tenancy protection provision. However, most of the borrowers in our consumer

research did not recall discussing or considering tenancy protection. Borrowers

indicated that they had generally relied on their discussions with other people,

rather than the documents they were given, to understand their loan.

56 In our consumer research, only one borrower indicated that they had

discussed tenancy protection with their lender and had taken action to protect

a non-borrower resident from possible eviction.

Finding 7: Contracts contain potentially unfair terms

57 The standard form terms and conditions in reverse mortgage contracts are

subject to laws which prohibit unfair contract terms.

58 We reviewed the most recent version of each lender’s standard terms and

conditions provided to ASIC. We found all five lenders’ contracts contained

terms that have the potential to be unfair.

REPORT 586: Review of reverse mortgage lending in Australia

59 Table 2 summarises several potentially unfair contract terms we identified in

our loan file review, including:

(a) entire agreement clauses in three lenders’ contracts;

(b) a broad indemnification clause in one lender’s contract that they have

agreed to remove;

(d) clauses of non-monetary default that potentially allow lenders to take

actions that are disproportionate to the nature of the breach.

Note: For full details of these terms, why we consider them to be potentially unfair,

what action we have taken to date and what further action we will take, see Table 13.

Where a contract contains a clause that is potentially unfair, we will ensure

it is removed or modified by the lender. Some lenders have already made

these changes to their contracts.

Table 2: Potentially unfair terms in reverse mortgage contracts

Type of clause

What we found

Entire agreement clauses

These clauses absolve the lender from

responsibility for conduct, statements or

representations that the lender makes to

the borrower outside of the contract.

Three lenders’ contracts contained an entire agreement clause.

One of these three lenders has removed this term and the second

is reviewing this clause; the third no longer provides reverse

mortgages.

Unilateral variation clauses

These clauses give lenders (but not

borrowers) a broad discretion to

unilaterally vary terms and conditions of

the contract, without the consent of the

borrower.

They are not necessarily unfair but can

be if they are drafted broadly and go

beyond what is reasonably necessary to

protect the legitimate interests of the

lender.

All lenders’ contracts contained unilateral variation clauses. Three

contracts had broad variation clauses allowing them an unfettered

discretion to vary any term or condition of the contract without

borrower consent.

These clauses are particularly concerning in reverse mortgage

contracts. Although borrowers can terminate the contract by

repaying the loan balance in full at any time, in practical terms

borrowers who wish to remain in their own home may have limited

options to refinance due to lender market concentration or equity

erosion. Some elderly borrowers may also be dealing with physical

or mental decline, which may inhibit their ability to refinance.

Non-monetary default clauses

These clauses are problematic where

they give lenders a broad discretion

about whether to treat an event or

circumstance as an actual default.

Contracts should not contain clauses that

allow lenders to respond to a default in a

way that is disproportionate to the nature

of the breach.

Four of the five lenders’ contracts contained a clause of default

relating to borrower misrepresentation, which had the potential to

operate in an unfair manner by capturing inadvertent minor untrue

statements that do not materially alter the lender’s credit risk.

Three lenders’ contracts contained broad default clauses for any

breach of contract which encompassed a range of breaches with

varying degrees of severity that did not always pose a material risk

to the lender.

REPORT 586: Review of reverse mortgage lending in Australia

Further action

61 Older Australians should have fair and equitable access to equity release

options such as reverse mortgages.

62 Although our findings indicate that reverse mortgages helped most

borrowers achieve their immediate financial goals, we also identified several

actions that we will require lenders to adopt to ensure that loans are not

unsuitable for the longer-term needs and objectives of borrowers.

63 Table 3 summarises further action for:

(a) lenders to improve their approach to meeting the responsible lending

obligations and to address the risks for consumers when they make

decisions about potential reverse mortgages; and

(b) those who give guidance to consumers about a reverse mortgage (e.g.

financial counsellors, financial advisers, lawyers and accountants) to

improve their ability to help clients understand the choices available.

64 Lenders have already made some changes in response to ASIC’s concerns

about potentially unfair contract terms and we will ensure that all remaining

terms are removed.

65 To help ensure that potential borrowers are adequately equipped to make

fully informed choices about benefits, cost, risks and alternatives, we will:

(a) commence a working group involving lenders and other industry

participants to ensure that our expectations for improved lending

practices for reverse mortgages are satisfied;

(b) monitor the protections that lenders implement or have implemented to

reduce the risk of financial elder abuse; and

within the next six months, to help prompt potential borrowers to

consider the features and risks of a reverse mortgage.

REPORT 586: Review of reverse mortgage lending in Australia

Table 3: Key issues for lenders and guidance providers

Issue

Key actions for lenders

Key areas of focus for guidance providers

Findings 1 and 2: Borrowers achieved

their immediate objectives, without a risk of

owing more than the value of their property

(See Sections B–C of the report)

N/A N/A

Finding 3: Some borrowers may not

recognise the impact of equity erosion on

their possible future needs

(See Section D of the report)

Lenders should document more detailed inquiries about

consumers’ future needs and objectives, including (but not

limited) to their needs and objectives for aged care and

inheritance.

Applications and questions in loan interviews should be framed

in ways that facilitate genuine discussion and reflection by the

borrowers about these issues.

If a borrower cannot afford or locate a paid financial guidance,

lenders should refer them to free information sources where

appropriate.

Guidance providers should help potential borrowers:

 calculate and develop a long-term understanding of their

possible future financial needs and objectives in specific

(not abstract) detail;

 estimate the effect that a proposed loan could have on

borrowers’ ability to afford these long-term needs and

objectives; and

 consider whether alternative solutions such as

downsizing and receiving family support are preferable to

a reverse mortgage.

Finding 4: Borrowers had limited options

due to market concentration

(See Section E of the report)

N/A N/A

Finding 5: Lenders have a role in reducing

the risk of financial elder abuse

(See Section F of the report)

Lenders should implement training and have effective

procedures in place to detect and address possible instances of

financial elder abuse.

Guidance providers should be alert to indicators of possible

financial elder abuse and know how to approach this issue

with clients if indicators are apparent.

Finding 6: Some loans might not protect

other residents

(See Section G of the report)

Lenders should inquire and record whether a consumer needs

tenancy protection, or whether the loan should have several

borrowers. If a borrower wants to protect a non-borrower

resident, without tenancy protection the loan may be unsuitable.

Guidance providers should investigate whether their client

may require some form of tenancy protection.

Finding 7: Contracts contain potentially

unfair terms

(See Section H of the report)

Lenders should remove potentially unfair contract terms. N/A

REPORT 586: Review of reverse mortgage lending in Australia

A The reverse mortgage lending market

Key points

A reverse mortgage allows the borrower to use the equity in their home as

security to borrow money. It is usually only available to older homeowners.

The effect of compound interest over a relatively long loan term, which is

characteristic of these and other equity release products, means that

borrowers may face an erosion of equity in their home among other risks.

Reverse mortgages are the only type of equity release product that are

subject to consumer credit regulation in Australia.

Features and risks of a reverse mortgage

66 A reverse mortgage is a credit facility that is typically secured against

residential property. Reverse mortgages are a type of ‘equity release product’

as they allow borrowers to release the equity in their home without losing

possession of the property. They are the only type of equity release product

that are regulated as credit products under the National Credit Act.

67 With a reverse mortgage, borrowers do not need to make repayments until a

specified event occurs (typically when all borrowers under the loan have

vacated the property or passed away): see Table 4.

68 Borrowers can also take out a special reverse mortgage that is generally

referred to as an ‘aged care loan’. These loans are designed to help

borrowers pay upfront for the aged care accommodation deposit and are

identical to a standard reverse mortgage except that they are limited by

lenders to a maximum term of five years. This means that the borrower can

move into aged care without needing to immediately sell their home.

Table 4: Key features of standard reverse mortgage products

Feature

Description

Loan eligibility The borrower must have an unencumbered interest over the security property, or

must discharge any pre-existing encumbrances as part of taking out the loan. Most

lenders require the borrower to be at least 65 years of age.

Loan amount The amount that can be borrowed under a reverse mortgage will be a certain

percentage of the total value of the borrower’s home equity. This is known as the

‘loan-to-valuation’ ratio (LVR).

Note: The National Credit Act prescribes limits on LVR based on borrower age above

which there is a rebuttable presumption the loan is unsuitable on LVR depending on

their age.

REPORT 586: Review of reverse mortgage lending in Australia

Feature

Description

Loan structure The loan may be taken as a lump sum, a line of credit, an income stream, or a

combination of these options. The most appropriate option for the borrower will

depend on their circumstances and the purpose of the loan. Some lenders only offer

one or a limited range of options.

Lines of credit allow borrowers to drawn down money as and when it is needed.

Only the amount drawn down accrues interest.

One lender in our review offered loans as progressive drawdowns. These allow

borrowers to draw down funds progressively as and when required, until the loan

amount has been reached. These loans are similar to lines of credit, except that:

 borrowers may still make voluntary repayments on these loans, but the loan must

be fully drawn down before any request for access to voluntary repayments will

be considered; and

 there is a minimum draw down amount per transaction.

An income stream provides ‘periodic income for consumers that do not need large

lump sums immediately’. It is different to a line of credit in that money is drawn

down at regular intervals and in regular amounts.

Repayments No repayments are required while the borrower lives in the home (although

borrowers are usually allowed to voluntarily repay the loan balance).

If no repayments are made, the loan balance (representing the debt owed to the

lender) will continue to capitalise and increase at a compounding rate, reducing the

equity in the home.

The loan must be repaid in full when the borrower vacates their home, moves into

aged care, sells their home or dies.

Interest Interest is compounding, typically at a variable rate and 1–2% higher than a

standard home loan.

Risks of a reverse mortgage

Erosion of equity in the home

69 Due to the effect of compound interest over a relatively long loan term,

borrowers who keep the loan for a longer period of time can face an erosion

of their wealth (equity) in their home. If too much wealth is eroded, there is a

risk that the borrower will find it more difficult to afford future needs when

the home is ultimately sold to repay the loan.

70 The ultimate effect of a reverse mortgage on the borrower’s remaining

equity depends on any changes in the interest rate for the loan, changes in

the value of the property, and the duration of the loan. These factors can be

difficult to predict in the long term.

71 Figure 4–Figure 7 illustrate how these factors can substantially influence the

effect of a reverse mortgage.

72 These scenarios are based on a 65-year old borrower who takes out a loan of

$118,627 (the average loan size) at an interest rate of 6.31%, secured against a

REPORT 586: Review of reverse mortgage lending in Australia

property valued at $632,598 (the average value of the secured property), and

repays this loan at age 84 (the average age at which Australians go into aged care).

73 Figure 4 illustrates that if the interest rate rises by 2% after the third year of

the loan, the borrower will pay $157,683 more in interest on the loan.

If interest rates rise by 4%, the borrower will pay $378,332 more in interest.

Figure 4: Effect of interest rate on total interest charges (year 3)

Note: See Table 21 in Appendix 3 for the underlying data shown in this figure (accessible version).

74 Figure 5 illustrates the effect of changes in the value of the secured property

on the borrower’s equity in their home after repaying the loan. If the value of

the property increases by 5% a year, the borrower will have $1,206,335 equity.

However, if the value only increases by 3%, the borrower will have $489,279

less equity (or $717,076) and if the value of the property stays the same, they

will have $965,946 less equity (or only $240,409) to cover future needs.

Figure 5: Effect of house price growth on remaining equity

Note: See Table 22 in Appendix 3 for the underlying data shown in this figure (accessible version).

$770,521

$549,871

$392,189

0 5 years 10 years 15 years 20 years

10.3% interest rate

8.3% interest rate

6.3% interest rate

$240,409

$717,076

$1,206,355

0 5 years 10 years 15 years

0% growth

3% growth

5% growth

starting equity ($513,971)

REPORT 586: Review of reverse mortgage lending in Australia

75 Figure 6 illustrates the effect of loan duration on the interest the borrower

pays, given the compound interest on reverse mortgage. If the borrower

repays the loan within one year, they will pay $7,706 in interest. However,

this increases to $43,870 after five years and $186,279 after 15 years.

Figure 6: Effect of loan duration on total interest charges

Note: See Table 23 in Appendix 3 for the underlying data shown in this figure (accessible version).

76 Figure 7 illustrates how taking out a larger loan relative to the initial value of

the secured property will result in the borrower paying more interest over the

life of the loan, which will reduce the amount of remaining home equity.

This example assumes a starting property value of $500,000 and compares a

$100,000 loan against a loan for $125,000.

Figure 7: Effect of LVR on remaining equity

Note: See Table 24 in Appendix 3 for the underlying data shown in this figure (accessible version).

$7,706

$43,870

$103,963

$186,279

0 5 years 10 years 15 years

$534,059

$448,386

0 5 years 10 years 15 years 20 years

Higher LVR

Lower LVR

REPORT 586: Review of reverse mortgage lending in Australia

Impact on Centrelink payments and other entitlements

77 A reverse mortgage may affect a borrower’s age pension or other government

benefits. This is because amounts received under a reverse mortgage may be

subject to the income and assets tests for Centrelink payments under the Social

Security Act 1991 (Social Security Act): see Table 5.

78 It is a particular risk if the loan is provided as an upfront lump sum, or if the

pensioner gifts the money from a reverse mortgage to other people because

gifts are also counted towards the assets and income tests. The risk for these

borrowers is greater as they may lose part of their pension without having

the benefit of the money borrowed.

Table 5: How a reverse mortgage can affect Centrelink payments

Type of test

How it applies

Income test A reverse mortgage falls within the definition of a ‘home equity

conversion agreement’. Such agreements are excluded from

the definition of ‘income’ but will be subject to deeming

provisions while it is held as a financial investment (e.g. held in

a bank account earning interest).

Note: See s8(1), (4)–(5) and 1073 of the Social Security Act.

Assets test Ordinarily, amounts equal to or less than $40,000 received

from a reverse mortgage will be exempt if held for less than

90 days, it will also be excluded from Centrelink’s assets test.

Any amount more than $40,000 or less than $40,000 but held

for more than 90 days (e.g. in a separate account or put into a

financial investment), it will be counted in the assets test and

may reduce the borrower’s age pension.

Note: A person’s principal place of residence is excluded from

the assets test: see s1118(1)(a)–(b) of the Social Security Act.

Accumulation of interest

79 If a consumer takes an upfront lump sum and does not use it straight away,

they will immediately begin paying interest on the entire amount, rather than

only on the amount they have spent. Taking a lump sum upfront will lead to

faster equity erosion.

80 A loan structure that gives the borrower access to the money on demand,

such as a line of credit, may be more appropriate where the consumer does

not plan to use the loan amount upfront.

Consequences for non-borrower residents

81 When a borrower passes away or moves into aged care, the loan must be

repaid typically by selling the secured property. This means that other

residents who are not borrowers, such as spouses and children, may have to

move out.

REPORT 586: Review of reverse mortgage lending in Australia

Market, borrower and loan characteristics

Market characteristics

82 When we published REP 109 in 2007, at least 15 lenders offered reverse

mortgages. Many of these lenders stopped offering new reverse mortgages

after the financial crisis in 2008. Since then, the volume of activity in this

market has gradually grown from $1.3 billion in March 2008 to $2.5 billion

by December 2017: see Figure 8.

Note: These figures are only for reverse mortgages provided by Australian deposit

taking institutions (ADIs).

Figure 8: Residential property exposure of ADIs to reverse mortgages

Source: Australian Prudential Regulation Authority (APRA)

Note: See paragraph 83 for a description of the trends shown in this figure (accessible version).

83 Figure 8 illustrates that the total property exposure of ADIs to reverse

mortgages rose steadily from $1.3 billion in March 2008 to $2.1 billion by

December 2012, then rose more gradually to $2.8 billion by June 2017. This

value fell to $2.5 billion by September 2017 and remained unchanged at

December 2017.

84 The lenders in our review used a variety of distribution strategies. One

lender relied primarily on in-person sales at bank branches, while another

offered reverse mortgages to attract brokers to its distribution network. Three

lenders had a mix of both broker and lender-originated loans: see Figure 9.

$0 bn

$1 bn

$2 bn

$3 bn

March 2008 March 2011 March 2014 March 2017

REPORT 586: Review of reverse mortgage lending in Australia

Figure 9: Distribution channels for reverse mortgages

Note: See Table 25 in Appendix 3 for the underlying data shown in this figure (accessible version).

85 Many of the brokers that distributed reverse mortgages specialised in

providing credit assistance specifically for reverse mortgages. A minority of

brokers were large aggregators that offered both equity release and other

conventional credit products.

86 Remuneration structures can shape incentives which, in turn, can affect

consumer outcomes. In 2017, ASIC published Report 516

Review of

mortgage broker remuneration (REP 516), which found that consumers who

went through broker channels obtained loans with higher LVRs and larger

loans in dollar terms.

87 The lenders in our review had varied commission arrangements, including:

(a) upfront commissions, which were often paid as a percentage of the

amount of credit approved for the loan;

(b) trail commissions, which when paid, were based on the amount of the

loan balance; and

within a certain time after loan origination.

88 The average loan amount for broker-originated loans was approximately

$147,646, which is significantly higher than the average for loans provided

directly by lenders ($106,373). This is consistent with our finding in REP

516 that borrowers who took out loans through brokers had larger loans.

However, we have not statistically controlled for any differences in borrower

characteristics that may have contributed to this difference.

Note: In REP 516, we found that borrowers who went through a broker tended to be

younger and have lower incomes.

41%

45%

88%

95%

100%

59%

55%

12%

Lender 5

Lender 4

Lender 3

Lender 2

Lender 1

Direct Broker

REPORT 586: Review of reverse mortgage lending in Australia

Borrower characteristics

89 While there is a higher incidence of sole female borrowers compared to sole

male borrowers, this is consistent with Australia’s population generally.

90 The most common age group to obtain a reverse mortgage was 65–74 years

for women and 65–79 years for men: see Figure 10.

Figure 10: Percentage of borrowers at origination (by age and gender)

Note: See Table 26 in Appendix 3 for the underlying data shown in this figure (accessible version).

Loan characteristics

91 Our review of the loan data indicated that:

(a) few borrowers have LVRs above the legislated LVR presumption

because of lender policies;

(b) nearly half of loans (45.5%) are finalised within four years; and

payment type being a lump sum.

Loan size

92 The average loan approved during our review period was $118,627 or

$123,600 adjusted for CPI in September 2017 (current values). The average

approved amount for new loans has been increasing from 2013 to 2017 from

$110,983 to $133,113 (in current values): see Table 6.

17%

10%

13%

10%

<1%

60–64

years

65–69

years

70–74

years

75–79

years

80–84

years

85–89

years

90+ years

Females

Males

REPORT 586: Review of reverse mortgage lending in Australia

Table 6: Average credit limit of reverse mortgages

Calendar year

Credit limit

Adjusted credit limit

2013

$103,043

$110,983

2014

$114,018

$119,798

2015

$124,037

$128,314

2016

$128,858

$131,549

2017

$132,031

$133,113

Loan duration

93 Borrowers who pay off their loans soon after commencement raise different

concerns compared to borrowers who intend to keep their loan for a longer

period. A borrower who pays off their loan within six months or two years is

unlikely to suffer substantial equity erosion due to the compounding effect of

interest. However, these borrowers may still be paying a relatively high total

cost of credit, due to the substantial application fees and other financial costs

for taking out a reverse mortgage.

94 Our data analysis indicates that 27.4% of loans ended within 24 months of

commencement and 45.5% of loans ended within 48 months: see Table 7.

Table 7: Duration of reverse mortgages

Period

Percentage of loans closed

12 months

14.3%

24 months

27.4%

36 months

37.9%

48 months

45.5%

95 The average age and LVR of borrowers who repaid within 48 months was

similar to that of all borrowers. The average approved loan amount was

slightly smaller (by $8,361) for borrowers who exited within 48 months

compared to all borrowers.

96 Early repayment is not necessarily indicative of a poor consumer outcome.

While voluntary early repayment may indicate that the loan did not meet the

borrower’s expectations, in some cases the borrower may have planned to

repay early at the time they took out the loan.

97 Our consumer research highlighted some examples of consumers who had or

who intended to repay their reverse mortgage relatively early.

REPORT 586: Review of reverse mortgage lending in Australia

Case study 6: Waiting on the property market

Kathleen lived by herself and was saving for retirement. She had some credit

card debt but was gradually paying this off. When one of her grown children

unexpectedly needed extra support, Kathleen had to leave her job.

Without work income, she could not afford to cover her debt repayments.

Kathleen took out a reverse mortgage to make these repayments.

Kathleen later re-entered the workforce and made voluntary repayments on

her reverse mortgage. She planned to sell her home shortly.

Case study 7: Planning to downsize

Fred was 65 years old and living alone after separating from his partner. He

decided to quit his job and redirect his efforts into building his dream home.

Living on the Newstart Allowance, Fred chose to take out a reverse

mortgage to cover the shortfall that losing his partner’s savings and wages

caused in finishing the new build.

He planned to finish the home, staying in it no more than 12 months, then

downsize in the same area to pay off the reverse mortgage. He anticipated

that his financial situation would then be comfortable.

Case study 8: Moving overseas

Following her divorce, Melissa took out a reverse mortgage of $40,000 on

her family home of 20 years to pay for preparations to move overseas. She

planned to sell the house and pay off the loan before leaving Australia.

Melissa was very specific about what she needed the money for and knew

she was going to sell the house to pay back the loan.

Loan structure

98 Most loans were lines of credit, because the most dominant lender in the

market only offered this type of loan structure: see Table 8.

Table 8: How loans were provided

Type of loan

Percentage of loans

Line of credit

70.2%

Lump sum

13.8%

Progressive drawdown

9.2%

Combination of lump sum and line of credit

5.5%

Income stream

0.3%

Other combinations

1.0%

REPORT 586: Review of reverse mortgage lending in Australia

99 There are two risks that particularly apply if a borrower takes a lump sum

payment:

(a) a risk of a decrease in age pension entitlements; and

(b) a risk of unnecessary interest accumulating.

Value of the security property

100 The average valuation of security property for the period we obtained data

was $632,598: see Figure 11. This average was skewed by more valuable

properties. The location of these properties was consistent with the general

population.

Figure 11: Distribution of the market value of the secured properties

Note: See Table 27 in Appendix 3 for the underlying data shown in this figure (accessible version).

13%

20%

16%

12%

$100,000

–200,000

$200,000–300,000

$300,000–400,000

$400,000–500,000

$500,000–600,000

$600,000–700,000

$700,000–800,000

$800,000–900,000

$900,000–1 million

$1–1.1 million

$1.1–1.2 million

$1.2–1.3 million

$1.3–1.4 million

$1.4+ million

Value of securied property

REPORT 586: Review of reverse mortgage lending in Australia

B Finding 1: Helping borrowers meet immediate

objectives

Key points

Each of the 30 borrowers in our consumer research reported feeling

satisfied that their reverse mortgage had enabled them to address their

immediate financial objectives.

Each of these borrowers had been focused almost exclusively on resolving

their immediate financial needs, and paid little to no attention to the longer-

term implications of their loan.

Borrowers believed that a reverse mortgage had been their ‘only option’ for

addressing their immediate financial objectives.

Immediate loan outcomes

101 Our consumer research indicated that the reverse mortgage enabled

borrowers to:

(a) maintain their current living arrangements without continuing to

experience financial stress;

(b) afford a better quality of life;

(d) have a general safety net for living expenses.

Maintaining current living arrangements

102 Some of the borrowers we interviewed told us that their reverse mortgage

had allowed them to maintain their current lifestyle. This primarily involved:

(a) holding onto their current home, which was usually the home in which

the borrower had anticipated living out their lives;

(b) maintaining the day-to-day lifestyle they currently enjoyed; and

Case study 9: Continuing to live at home

Amy and Roger had lived in the same home for the last 30 years. They

took out a reverse mortgage to finance home improvements that they

believed would allow them to continue living independently in their home as

they grew older. These improvements included building a ramp to replace

stairs, replacing ageing carpets, and installing heating and cooling systems.

REPORT 586: Review of reverse mortgage lending in Australia

103 The loan allowed some borrowers to maintain their existing lifestyles by

supplementing the shortfall from their pensions and other income.

‘I’m taking it [the loan] in $20,000 amounts every quarter. It just allowed

me to have a cash flow and keep doing what I’m doing, like travel and so

on.’

‘It will allow us to enjoy what time we have left in our own home and not

have the stress and concerns of watching things fall apart around us.’

104 Several of the borrowers in our loan file review appeared to be experiencing

significant financial need immediately before they took out the loan. These

borrowers often had minimal cash, few major assets besides their home, and

sometimes large credit card debt.

105 The borrowers we interviewed indicated that their reverse mortgage allowed

them to move from a financially strained to an adequately funded lifestyle.

The reverse mortgage relieved the stress of finding ways to pay for current

lifestyle expenses or larger expenses, such as maintaining a vehicle,

refurbishing their home, or managing other debt.

106 Borrowers indicated that these benefits far outweighed any concerns about

the future implications of a reverse mortgage.

Achieving a better quality of life

107 Some borrowers said that they took out a reverse mortgage for a slightly

more comfortable or enjoyable day-to-day lifestyle. The pension alone, even

when supplemented by other income, was often identified as insufficient to

enjoy life despite budgeting.

‘My car was 21 years old and I thought I really only need one more car but

it needs to be new now so it will last me for another 20 [years].’

‘I’d always wanted to go to India and Europe. I’ve done that now, and the

rest of the money is sitting there for me to draw on if I need it.’

‘I was just sitting here with no cash, watching the kids go off on their

overseas trips and here was dear old Mum left here with her knitting. It’s

no use being asset rich and cash poor and bored, especially when you don’t

have much time left necessarily.’

108 Not all of the loans we reviewed had been taken out to cover essential goods

and services.

Case study 10: A holiday on home equity

Joey was 66 years old, retired, and living primarily off his pension. He had

a property valued at $360,000 and only $1,019 of cash in his bank account

which was held by a different lender. He borrowed a $70,000 lump sum

through a reverse mortgage to pay for a holiday.

REPORT 586: Review of reverse mortgage lending in Australia

Short-term finance

109 Some borrowers took out a reverse mortgage as a temporary financing

arrangement (e.g. to provide liquidity before selling a major asset) or to pay

for a residential accommodation deposit upfront and help with a gradual

transition to aged care before selling their home.

A safety net for the future

110 Several borrowers in our consumer research and loan file review applied for

a lump sum to meet their immediate needs and a line of credit to make

money available for unexpected future expenses. However, a line of credit

was generally not the primary focus or motivation for their loan.

111 When borrowers did this, most applied for a loan of up to the maximum

amount of credit that was available to them.

‘Maybe we might dip into it [the loan] again for travel but it won’t be big

time. Maybe a cruise. But it might also have to cover our cost of living. We

have a small pension but it will run out in a few years so I can see it may

end up covering that.’

‘We were approved for up to $140,000. We used $50,000 of that to do the

needed repairs and renovations that the house needed and then the

remainder is there if we need it.’

Perceived lack of alternative choices

112 All the borrowers we interviewed expressed a belief that they ‘did not have a

choice’ about whether to take out a reverse mortgage and characterised their

loan as ‘their saviour’ or as the ‘only option’ available to them.

113 Each of the borrowers we interviewed cited some change or unforeseen

impact on their financial situation that had led them to seek additional

money through a reverse mortgage, such as:

(a) separation or divorce;

(b) losses in their superannuation fund;

(d) costs to support children beyond a normal dependency age;

(e) unexpected residential costs;

(f) early retirement; or

(g) a higher cost of living (e.g. electricity and utility expenses).

REPORT 586: Review of reverse mortgage lending in Australia

Case study 11: Unexpected body corporate fees

To pay for renovations to the exterior façade of the apartment building, the

body corporate fees on Anthony’s apartment increased significantly and he

could no longer afford them. Faced with the idea of being forced to sell his

home, he took out a reverse mortgage.

Case study 12: Early loss of employment

Tom worked for the same employer for about 40 years. After taking unpaid

leave to recover from an unexpected illness, his employment was

terminated with three weeks’ salary. Tom was ineligible to receive the age

pension, so he took out a reverse mortgage to supplement his

superannuation to cover his day-to-day living expenses.

114 These unforeseen changes occurred when some borrowers were either close

to or in full retirement and were relying on the age pension to cover their

day-to-day living expenses. Some borrowers indicated that they had

retirement plans or pensions which could not accommodate unexpected

expenses or changes in financial circumstances.

115 For these borrowers, downsizing or relying on assistance from family

members were not desirable alternatives. They were also unaware of any

other equity release options.

Downsizing

116 Borrowers conveyed a strong preference towards remaining in their home.

Selling the property to improve their financial position was unacceptable.

117 Many borrowers highlighted familiarity and emotional attachment to their

home, and a desire to continue living in it, as factors that had originally

motivated them to consider a reverse mortgage in the first place.

‘I still love this house it’s very precious to us and we want to be here as

long as we can.’

‘Here we are amongst friends and family, we don’t want to move at this

stage in life, we have everything we want and need around us here.’

118 From 1 July 2018, consumers aged over 65 will be able to make non-

concessional contributions to their superannuation of up to $300,000 from

the sale of their home, subject to eligibility requirements. This was

announced in the 2017–18 Federal Budget to encourage older consumers to

downsize their homes and to increase the supply of housing for younger

families.

REPORT 586: Review of reverse mortgage lending in Australia

Assistance from family members

119 Many of the borrowers we interviewed either did not have family to help

them financially, or preferred to borrow against their home equity rather than

receive family assistance.

‘One of our kids said we’ve got the money dad, we could have given it to

you. He was actually really angry with us that we had done it and not told

him. But we said we’re fine, we’ve organised it, we don’t want to have

them carrying us.’

‘Possibly I could have asked for a loan from one of my children but I didn’t

want to do that because I have no way of paying it back. I want to keep the

debt to myself.’

‘[My daughter’s partner] looked into it for us and… it seemed to offer us a

way forward that we could manage on our own.’

120 In some cases, borrowers had taken out the loan to support a family member.

We did not consider whether these loan purposes were genuinely held: see

our discussion of financial elder abuse in Section D.

‘My son came back to live here with his wife—I needed to be able to help

support them.’

‘I wanted to help my daughter pay for some of my grandchildren’s private

education.’

Pension Loans Scheme

121 The current Pension Loans Scheme had limited uptake from 2016 to 2017.

Payments can only be accessed as an income stream (paid with the

fortnightly pension payment) and the amount that can be borrowed is the

difference between the full age pension and the current pension payment.

This means only those receiving a partial age pension and eligible self-

funded retirees can access the scheme. Those on a full age pension are

ineligible.

122 While this may be a good option for those looking to cover ongoing living

expenses and increase their quality of life, it will not meet the needs of

borrowers who require an upfront lump sum for a particular purpose (e.g.

renovations, medical expenses, a holiday, or a one-off large item like a car).

Our loan file review showed that 40% of borrowers either took all or part of

the loan amount as an upfront lump sum.

Other equity release options

123 Equity release products other than reverse mortgages were outside the focus

of this review. However, our high-level analysis suggests that the limitations

of these options, combined with low awareness among potential borrowers,

may have contributed to some borrowers believing that a reverse mortgage

was their ‘only option’: see Table 9.

REPORT 586: Review of reverse mortgage lending in Australia

Table 9: Limitations of other equity release options

Product type and description

Limitations

Standard home loans

Borrowers are required to make repayments during the term of the loan.

Home reversion schemes

Homeowners sell an agreed percentage

of their home’s future sale value to the

scheme provider in exchange for an

upfront payment.

This type of scheme is only offered by one provider and is only

available to consumers aged 60 years or over who own property in

specific Sydney and Melbourne postcodes.

Calculating the amount of the upfront payment can be complex.

This is calculated based on the current valuation of the home and

other factors that are likely to affect the future value of the home

(e.g. the location), the value of retained ownership benefits held by

the homeowner (e.g. rent-free tenancy rights) and the duration of

the agreement (e.g. the homeowner’s age and life expectancy).

Pension Loans Scheme

Some pensioners can receive an income

stream loan secured against real property

with interest compounding on the loan.

Note: See Department of Human

Services, Pension Loans Scheme

The borrowable amount is capped at the maximum age pension

rate. This means that older Australians who receive the full age

pension are currently ineligible for the scheme.

The loan can only be drawn as an income stream, which may be

unsuitable for pensioners who need money to cover larger expenses

such as unexpected health costs or home maintenance and repairs.

In May 2018, the Australian Government announced plans to

expand the Pension Loans Scheme. F

rom 1 July 2019 the maximum

payment under the scheme will increase so that borrowers can

supplement their income up to 150% of the full age pension.

Expanded Pension Loans Scheme

In the 2018–19 Federal Budget, the

Australian Government announced the

proposed expansion of the scheme to

allow those on the full age pension and

self-funded retirees to access the scheme

from 1 July 2019.

Note: See Fact Sheet 3.3 Expansion of

the pension loans scheme.

Under the proposal, from July 2019 all age pensioners will be able to

use a reverse mortgage to increase their income to up to 150% of the

age pension rate. Pensioners on the full rate will be able to increase

their income by up to $11,799 (singles) or $17,787 (couples) per year.

The income and assets test no longer apply to exclude pensioners who

would otherwise be eligible for the scheme.

Payments are still limited to a fortnightly income stream.

Rates deferral schemes

Pensioners can defer payment on all or part

of a rates bill based on the amount of home

equity they hold, with the debt balance and

interest secured against this equity.

This type of scheme is only available to some pensioners in South

Australia, the Australian Capital Territory and some local council areas.

Due to its specific purpose, this type of scheme is usually not a

practical option for older consumers seeking to release their home

equity for any purpose other than to pay rates.

Note 1: ASIC may have limited jurisdiction for these products if they fall within the scope of Ch 7 of the Corporations Act.

However, some schemes may fall outside this regime depending on their particular structure and features. Some of these

products are also not subject to regulation under the National Credit Act.

Note 2: See Appendix 3 for a summary of the regulation of equity release products in a number of other jurisdictions, including

the United States, United Kingdom, New Zealand, Japan and South Korea.

REPORT 586: Review of reverse mortgage lending in Australia

C Finding 2: The ‘no negative equity guarantee’

Key points

The NNEG has addressed the risk of negative equity by incentivising more

conservative lending practices. The NNEG also protects borrowers in the

event of a substantial downturn in property prices.

Purpose of the guarantee

124 Before the introduction of a ‘no negative equity guarantee’ (NNEG),

borrowers faced a risk of eventually owing more on their loan than what they

could recover from selling the secured property. Because this risk was borne

entirely by borrowers, the Australian Government observed that, in the

absence of the NNEG, lenders can be ‘less conservative in their lending

practices and more aggressive in enforcement actions’.

Note: See Explanatory Memorandum, Enhancements Bill, p. 206.

125 The introduction of a statutory mandatory NNEG in Australia follows

similar regulation overseas. The Explanatory Memorandum to the enhanced

consumer protections highlights the negative consumer experiences that

resulted from the absence of a mandatory NNEG in the United Kingdom.

‘In the late 1980s[,] thousands of retired people took out variable rate

reverse mortgages to invest in stock market related investment bonds.

The income from these bonds was expected to be sufficient to pay the

interest on the mortgage and provide additional regular income.

‘However, due to poor market performance, coupled with increasing

interest rates and decreasing property values, many consumers’ debts

exceeded the value of their properties, with many borrowers being evicted.’

Note: See Explanatory Memorandum, Enhancements Bill, p. 206. See also Report 59

Equity release products (REP 59).

126 The NNEG operates by preventing lenders from collecting more from the

loan than the market value of their secured property. This means that

borrowers can continue living in their homes without any risk of being

unable to pay off the loan balance by using the proceeds of sale.

Outcomes of the guarantee

127 During the period we reviewed, lenders imposed limits on the maximum

LVR of new loans, partly to avoid entering into a loan that may trigger the

NNEG. These limits were more conservative than the LVRs that are

prescribed in the enhanced consumer protections.

Note: A reverse mortgage is presumed to be unsuitable if the LVR under the loan would

exceed the prescribed amount when the loan is taken out (LVR presumption). The

REPORT 586: Review of reverse mortgage lending in Australia

prescribed amounts are 15% if the youngest borrower is 55 years or younger, or, if the

youngest borrower is over 55 years, 15% plus 1% for each year the borrower is over 55:

see reg 28LC of the National Credit Regulations.

128

LVR limits effectively limit the amount of interest that can accrue on new

loans, which means that borrowers are less likely to completely deplete the

equity in their home because of the loan.

129 As a result, our data analysis suggests that only two out of 15,053 loans are

likely to reach a loan balance that exceeds the market value of the secured

property by the time the borrower reaches 84 years of age, assuming that

interest rates on these loans stay the same and property prices rise by 3% per

annum.

130 Borrowers are likely to lose all their equity only if there is a large increase in

interest rates or decline in house prices. Even if interest rates increased by

4% and house prices stay the same, only 15% of borrowers will rely on the

negative equity guarantee at age 84: see Figure 12.

Figure 12: Percentage of loans with no remaining equity at age 84

Note: See Table 28 in Appendix 3 for the underlying data shown in this figure (accessible version).

131 Figure 12 also illustrates that the NNEG may also protect a small minority of

borrowers if interest rates rise substantially, if residential property prices do

not grow, or fall, or if a combination of these events occur. For example, if

the interest rate on all the reverse mortgages in our review rise by 3%, and

property prices stay the same, then 6% of borrowers are likely to trigger the

NNEG by the time they are 84 years old.

20%

40%

+0% +1% +2% +3% +4% +5%

Percentage of loans

Interest rate change

-3% property

growth

0% property

growth

3% property

growth

REPORT 586: Review of reverse mortgage lending in Australia

132 From another perspective, few borrowers will reach negative equity after

five or 10 years, regardless of changes to house prices or interest rates. For

example, even if interest rates increase by 4% (to an average of 10.31%) and

house prices stay the same over 10 years, only 3% of borrowers will need to

rely on the negative equity guarantee: see Figure 13.

Figure 13: Percentage of loans with no remaining equity after 10 years

Note: See Table 29 in Appendix 3 for the underlying data shown in this figure (accessible version).

20%

40%

+0% +1% +2% +3% +4% +5%

Percentage of loans

Interest rate change

-3% property

growth

0% property

growth

REPORT 586: Review of reverse mortgage lending in Australia

D Finding 3: The risk of equity erosion

Key points

Borrowers were generally either optimistic about, or not focused on, the

amount of equity they would have left, even though our data analysis

indicated there was a risk of equity erosion for some borrowers.

Equity erosion may mean borrowers cannot pay the deposit for aged care.

This is a real risk for certain types of borrowers. The risk is increased if

property prices do not continue to rise or interest rates go up (or a

combination of the two).

The requirement that lenders inquire about future needs, including aged

care and whether they wish to leave equity in the property, has not

prompted meaningful consideration of these future needs by the borrower

or lender.

While independent professional guidance could assist borrowers, there are

significant barriers that prevent or deter borrowers from finding and

receiving this guidance.

Borrower outlook and perceptions

Borrowers were optimistic about the future

133 Nearly all the borrowers we interviewed were highly optimistic about the

long-term consequences of their loan. Not a single borrower was concerned

about the loan affecting their ability to afford future expenses. Their reasons

for this optimism are discussed below.

134 While some aspects of this optimism may be justified, most of the borrowers

in our consumer research did not actually consider the possible long-term

practical consequences that equity erosion may have on their future financial

situation.

135 When we asked borrowers how their decision to take out a reverse mortgage

might affect their financial situation in the long term, many indicated that

they had not seriously considered their future needs.

136 A number of factors influenced this optimistic outlook.

The belief that property prices will continue to rise

137 Most borrowers believed that the market value of their property would grow

and outstrip the growth of their loan balance. This belief was reinforced by

continued recent media coverage.

‘The mathematics doesn’t perturb me. Toowoomba is developing.’

REPORT 586: Review of reverse mortgage lending in Australia

‘With Sydney prices continuing to increase, I can’t see how there would be

nothing left if I needed it.’

‘We don’t need to worry about [the negative equity guarantee] because this

house goes up more than the interest rate each year.’

‘Yes, the new train line will make a positive difference.’

Failure to consider future expenses

138 Some borrowers only briefly considered their future expenses.

‘We have talked about aged care, [our daughter] lives close by, if we need

help she will sell her house and come and live with us’

‘If I ever have to go into aged care I am assuming my pension will look

after that’

‘We’ve considered our ageing in the refurbishment of our home, it’s all one

level, and wheelchair access is very feasible.’

Simplistic calculation of equity available

139 Some borrowers suggested that the loan carried few risks simply because the

property value was significantly greater than their loan balance.

‘The house was valued at $650,000 and our loan is only for $120,000, so

there is still a lot left.’

Avoiding thinking about the future consequences

140 Most of the borrowers we interviewed had either not considered or actively

avoided estimating how much equity would still be available to them several

years from now. This may have influenced some borrowers’ perceptions

about the long-term risks of their loan.

‘The reverse mortgage means it diminishes in some way what we leave, but

on the other side I just live for today and not worry about tomorrow.’

‘I’m not quite sure how much I took out, or the rate of interest in the end.

But I don’t have any goals really—I haven’t got much of a future!’

‘I dismiss the idea of aged care. It’s too far in the future, and the sector

itself is changing so much.’

141 In several interviews, borrowers dismissed questions about their long-term

needs by commenting that they may not be alive to consider these issues.

‘I don’t have expectations of having a very long life.’

‘I won’t be here so it won’t matter.’

‘We’ll be gone by then. It won’t matter to us, will it?’

‘From a financial perspective, it is good because it doesn’t really affect us

until we are dead.’

REPORT 586: Review of reverse mortgage lending in Australia

Lenders’ obligation to inquire about requirements and objectives

142 Our loan file review highlighted potential inadequacies in lenders’ inquiries,

including that:

(a) lenders failed to make or document detailed inquiries into consumers’

long-term needs and objectives;

(b) lenders’ application processes focused primarily on the borrower’s

short-term needs; and

in ways that were unlikely to promote real discussion or consideration

of these issues.

Responsible lending obligations

143 Under the National Credit Act, lenders (acting as a credit provider) and

brokers (providing credit assistance) have responsible lending obligations to:

(a) make reasonable inquiries about both the consumer’s requirements and

objectives and their financial situation;

(b) take reasonable steps to verify the consumer’s financial situation; and

preliminary for the broker) about whether the credit contract is ‘not

unsuitable’ for the consumer.

Additional inquiries for reverse mortgages

144 Recognising that reverse mortgages and the consumers who use them are

very different to traditional loans and borrowers, additional responsible

lending obligations were introduced in 2012. For a reverse mortgage, lenders

have an obligation to make additional inquiries about the consumer’s

requirements and objectives in meeting possible future needs, including (but

not limited to):

(a) a possible need for aged care accommodation; and

(b) whether the consumer wants to leave equity in the dwelling or land to

the consumer’s estate.

145 These additional obligations were imposed to:

require credit licensees to discuss with reverse mortgage applicants, not just

the short term effects of the reverse mortgage, but also how the loan may

affect the borrower’s options as they age.

Note: See Attachment A of the Explanatory Statement to the National Consumer Credit

Protection Amendment Regulation 2013 (No. 2).

REPORT 586: Review of reverse mortgage lending in Australia

146 RG 209 also discusses why we expect a higher standard of investigation and

verification to ensure that a reverse mortgage meets the consumer’s

requirements and objectives, including that:

(a) reverse mortgages are a complex type of credit product;

(b) consumers are often seniors who are using their primary residence and

only significant asset; and

are potentially severe.

Inquiries into borrowers’ needs lack detail

147 While our loan file review showed that lenders made inquiries into

borrowers’ needs and objectives, the level of detail in these inquiries could

be improved to ensure the loan is not unsuitable. In particular, inquiries into

the borrower’s long-term needs were not conducted in a meaningful way that

would cause the borrower to consider these needs.

148 Lenders generally did not inquire about, or differentiate between, borrowers’

short-term and long-term needs. Where long-term needs were considered,

the level of detail was very limited given the complex nature of the product

and its effect on the borrower’s future equity.

149 In general, discussions focused on the borrower’s short-term needs with

questions about future needs (e.g. aged care accommodation and desire to

leave equity in the home) treated more as a procedural requirement in the

application process. These questions were also framed in ways that were

unlikely to promote consideration or discussion about whether the loan

would be unsuitable in light of these needs.

Future needs

150 The attachment to the Explanatory Statement to the National Consumer

Credit Protection Amendment Regulation 2013 (No. 2) states:

in relation to a reverse mortgage, credit assistance providers and credit

providers will be required to make reasonable inquiries about a consumer’s

requirements and objectives in meeting future needs

151 Ageing consumers have different needs and expenses such as increased

medical costs and aged care needs. In particular, lenders are required to ask

specific questions about the borrower’s future need for aged care

accommodation and desire to leave equity in the property for their estate.

152 These requirements are designed to help consumers better balance the short-

term need to access equity in their home against the long-term impact of

reducing this equity.

REPORT 586: Review of reverse mortgage lending in Australia

153 The Explanatory Statement to the National Consumer Credit Protection

Amendment Regulation 2013 (No. 2) recognises that there will be no

certainty about the amount of equity that may exist at any point in the future.

The intention of these requirements is for the lender to open a discussion of

possible future needs with the consumer and the outcome of the conversation

is likely to reflect this uncertainty.

154 However, lenders treated these requirements more as procedural steps that

needed to be ticked off rather than as a way to open up discussion about the

long-term effect the loan could have on the borrower’s financial position.

Aged care accommodation

155 Each lender used a tick box to record they had made inquiries about aged

care but usually did not record detailed responses. Four lenders had a tick

box for the consumer to acknowledge they had considered this issue.

156 In the consumer interviews, borrowers did not recall this topic being

discussed. They said that the application was more focused on their current

financial situation rather than future needs for aged care or health concerns.

157 We note this does not mean that aged care was not discussed, just that

consumers cannot recall the conversation. Our research suggests that consumers

were so focused on resolving their immediate financial problems that other

issues tended to be filtered out or dismissed by the consumer as irrelevant.

158 Borrowers felt it was hard to plan for the future and in particular did not

know how much they would need for aged care or health expenses.

Borrowers noted the increase in in-home care services. With the number of

these services increasing, it is important that lenders include in-home care in

any discussions about costs associated with ageing.

159 An industry stakeholder noted that aged care providers might encourage

consumers to pay the accommodation fees by lump sum rather than by the

daily amount if they want to get in earlier. If a reverse mortgage is used to

fund the lump sum, the interest accruing on that larger amount could end up

costing the consumer more than if they paid the daily amount.

Case study 13: Younger borrower with no detailed inquiries into

future requirements

A 65-year old borrower took out a reverse mortgage of around $40,000 for

personal goods. The borrower ticked several boxes in his application form

to indicate that he had considered his needs and objectives, but there were

no detailed inquiries on file into possible aged care requirements or

whether he wanted to leave a portion of equity in the property. There was

also no evidence on file about whether the borrower had been given equity

projections, or if there had been a discussion about what the equity

projections might look like.

REPORT 586: Review of reverse mortgage lending in Australia

Desire to leave equity in the property

160 In practice, all five lenders recorded inquiries into consumers’ desire to leave

equity in the property to their estate by a tick a box on the file that they had

made the inquiry. Some lenders at times also included acknowledgments to

confirm that consumers had considered it. 16% of files did not contain either

a consumer acknowledgement or lender tick box recording this inquiry. Only

three files, all from the same lender, recorded detailed inquires and responses

to this question.

161 While one lender noted that consumers wanted to preserve a certain amount

of equity, there was no evidence in the files to show if this issue had been

considered by the lender. In three out of four instances, the amount of equity

the consumer asked to be preserved was also the application amount. It is not

clear whether the consumers misunderstood the question on the form or

whether it was actually their intention to preserve that amount of equity.

162 As discussed at paragraph 137, most borrowers believed they would retain

some equity in their home as they believed house prices would increase

faster than interest accrued on their loan.

Loan purpose, amount, structure and duration

163 Based on our loan file review, lenders made very limited inquiries about the

purpose of the loan and often did not specify why the particular loan amount or

loan structure was requested or the timeframe that the money was to be used for.

164 Even though reverse mortgages are generally taken out for short-term

purposes, they can have a long-term effect on borrowers’ equity. From the

quantitative data we reviewed, 62% of borrowers kept the loan for more than

three years and 54.5% of borrowers kept the loan for more than four years.

165 Given the effect of compounding interest and the reduction of equity in the

home over time, it is appropriate for lenders to inquire about the borrower’s

intended use of the loan. Such inquiries could include:

(a) whether the borrower intends to hold the loan product for a short period

only and repay it or whether they intended to use the loan for a longer term;

(b) whether the loan amount is sufficient for their needs, including what it

will be used for and how quickly they intend to use the money;

best meet these needs and minimise equity erosion;

(d) if the loan is for a one-off purpose (e.g. buying a car), whether the

borrower has enough money to continue making other payments such as

maintenance, rates and bills for the property; and

(e) if the loan is for everyday living expenses, whether the money will last

only a short time and what the borrower plans to do after it runs out.

REPORT 586: Review of reverse mortgage lending in Australia

166 For 9.7% of loans, the credit limit was increased after the loan was taken out.

This suggests that the lender may not have been making enough inquiries into

whether the original loan amount would meet the borrower’s needs. It could

also mean borrowers needed more money than they initially thought. For one

lender, just over 26% of the loans we reviewed were topped up after the

borrower took out their original loan: see Figure 14.

Figure 14: Percentage of loans where borrowers applied for a top-up

shortly after taking out the loan

Note: See Table 30 in Appendix 3 for the underlying data shown in this figure (accessible version).

Case study 14: Limited inquiries into loan purpose and amounts

Jude applied for a loan of about $20,000 for bills and possibly a holiday.

There were no inquiries into the amounts she intended to use for each

purpose. Jude ended up applying for two top ups to her loan over the next

18 months for personal use and renovations.

Excess interest on lump sum loans

167 Consideration of the requirements and objectives of borrowers should include

a consideration of which loan structure best meets the consumer’s needs.

168 Of the upfront lump sum loans in our loan file review, 45% were potentially

unsuitable for the consumer because of the loan structure (i.e. the recorded

purpose did not support the need for the whole amount to be taken upfront).

Because the files did not include data on how the consumer actually used the

money from the loan, this is only an inference based on the recorded

purpose. This exposes the consumer to an increased risk of equity erosion.

Case study 15: Excess interest paid on unsuitable lump sum loan

A married couple aged in their early 70s took out a reverse mortgage of

$100,000. The recorded purpose of the loan was for general living

expenses. The application contained a specific request for $50,000 of the

loan funds to be provided as drawdown facility to be used for future living

expenses. The entire loan amount was provided as an upfront lump sum.

There were no notes on file to indicate why this was the case.

Two years and nine months after the reverse mortgage was taken out,

$18,500 of interest had accrued on the account. This is almost $10,000

more than the consumers would have paid if they had only accessed

$50,000 of the loan amount over the same period.

13%

26%

Lender 3

Lender 2

Lender 1

REPORT 586: Review of reverse mortgage lending in Australia

Borrowing trends

Borrowers take close to the maximum amount available

169 Our data analysis indicated that a substantial proportion of borrowers tended

to take out a reverse mortgage for a credit limit at or very close to the

maximum LVR that had been permitted by their lender. In particular, 41% of

loans had a credit limit between 99.9% and 100.1% of the maximum

permitted LVR. This was less common for loans that were structured as an

income stream: see Figure 3.

170 This behaviour could suggest that:

(a) some borrowers would like to borrow more than the amount permitted

by lender policy, but are restricted to the lender maximum; or

(b) borrowers are encouraged, either by lenders or brokers or for other

reasons, to borrow the maximum allowable.

171 One lender had set a fixed maximum LVR for all borrowers irrespective of

their age. Loans by this lender were around the maximum lender LVR, even

for older borrowers who could have obtained a higher LVR by applying to a

different lender. This may suggest that some borrowers tended to apply for

the largest possible credit limit, or that some only approached one lender

when looking into a reverse mortgage.

Analysis of loan data

172 We used the data obtained from lenders and some basic assumptions to test

how much equity borrowers will actually have left at the end of their loan.

We tested this against several benchmarks:

(a) whether they will have enough for the average upfront cost of

residential aged care; and

(b) whether they will have 50% of the equity in their home left.

Paying for aged care

173 Residents going into aged care may need to pay the full amount upfront or a

refundable accommodation deposit. We used $380,000 (at current values) as

a benchmark to assess whether borrowers will be able to afford this deposit.

174 To assess whether borrowers will have enough, we estimated the amount of

home equity that borrowers would have when they reach 84 years old, which

is the average age of entering permanent residential aged care.

175 Although our data analysis indicates that no borrowers are likely to trigger

the negative equity guarantee, many more borrowers are likely to have less

REPORT 586: Review of reverse mortgage lending in Australia

than $380,000 at age 84: see Figure 15. These borrowers may need to pay a

combination of a deposit and a daily payment or apply for a government

supported place.

Figure 15: Percentage of loans with less than $380,000 equity at age 84

Note: See Table 31 in Appendix 3 for the underlying data shown in this figure (accessible version).

176 For example, Figure 16 illustrates how an increase in variable interest rates

on loans could reduce the amount of home equity that is available to existing

borrowers when they reach the average retirement age of 84. Figure 17

illustrates a scenario where property prices stay the same.

Figure 16: Percentage of borrowers with lower home equity at age 84, if interest rates rise by 3%

Note: See Table 32 in Appendix 3 for the underlying data shown in this figure (accessible version).

30%

50%

70%

90%

+0% +1% +2% +3% +4% +5%

Percentage of loans

Interest rate change

3% property

growth

5% property

growth

0% propertygrowth

42%

28%

18%

16%

23%

20%

15%

12%

20–30% 30–40% 40–50% 50–60% 60–70% 70–80% 80–90% 90–100%

Remaining home equity

If interest rates stay the same

If interest rates rise by 3%

REPORT 586: Review of reverse mortgage lending in Australia

Figure 17: Percentage of borrowers with lower home equity at age 84, if property prices stay the same

Note: See Table 33 in Appendix 3 for the underlying data shown in this figure (accessible version).

Risk factors for equity erosion

177 We wanted to determine what characteristics of borrowers put them at high risk

of equity erosion. To do this, we selected a group at high risk of erosion and then

looked for differences between this group and the total borrower population.

Equity erosion was more likely for younger borrowers with higher LVRs. Lower

initial property values also appear to increase the risk of equity erosion.

178 We selected the high-risk group by assuming 3% per annum house price

growth and by assuming that the interest rate will stay the same as at the date

of application. Out the 17,053 loans in our analysis, only 57 loans would

have negative equity at aged 84 (and therefore would rely on the negative

equity guarantee) under those assumptions.

179 All 57 loans in the high-risk group have both age lower than average age at

application of all reverse mortgage borrowers, and higher LVR than the

average LVR at application.

180 In addition, of the 57 loans that have negative equity, 82% have a property

value lower than the average property value of all reverse mortgage borrowers.

Interest rates and house prices

181 Future changes in house price growth (even if interest rates stay the same)

will have an impact on the percentage of borrowers with greater than 90% of

their original equity remaining at age 84.

182 With house price growth of 3% per annum, most borrowers will have 90% or

greater equity remaining at age 84. If house prices are static, few borrowers

(4%) will have 90% equity and 60% of borrowers will have between 40 and

70% of their equity remaining at age 84.

42%

28%

18%

16%

23%

21%

15%

12%

20–30% 30–40% 40–50% 50–

60%

60–70% 70–80% 80–90% 90–100%

Remaining home equity

If property prices rise 3% p.a.

If property prices stay the same

REPORT 586: Review of reverse mortgage lending in Australia

Loan duration

183 Lenders did not generally ask how long borrowers intended to remain in the

loan. Without making inquiries into the borrower’s anticipated exit strategy,

lenders will not know if they are likely to be at risk of not having enough

money left to pay for aged care.

184 The following two case studies from our loan file review are examples of

loans where the lender did not ask about exit strategy; in one case, the

borrower paid back the loan quickly and in the other the borrower appears to

be at risk of equity erosion.

Note: For information on loan duration from our data analysis, see Section A.

Case study 16: No inquiries but voluntary repayments

Justine (aged 66) applied for a reverse mortgage for home improvements

of $62,500. A lower than expected valuation of $210,000 meant she was

only able to obtain $52,500 because of the lender’s maximum LVR policy.

Her lender did not make any enquiries into Justine’s exit strategy.

Justine immediately deposited some of the lump sum loan back into the

account and made repayments equivalent to the interest charges. Justine

repaid the full loan after less than 2 years by making a large repayment.

The relatively high LVR for her age and relatively low property value meant

there was a risk of erosion. This was minimised by Justine’s voluntary

repayments.

Without making voluntary repayments, at age 84 Justine would have only

$120,398 if her variable interest rate increased by 2% and the value of her

house increased by 3% per annum.

Case study 17: Few inquiries and no exit plan

Kimberly, a 65-year old widowed pensioner, was seeking to re-finance her

existing mortgage of approximately $22,000 and buy a car. Her home was

valued at $200,000 and she borrowed $40,000 with a reverse mortgage.

Her lender did not ask about an exit plan for the loan. There was only a

tick-a-box question about future aged care needs.

Kimberly made some voluntary repayments when she could, but the loan

was still active after three and a half years and interest was accumulating

on the balance.

If her variable interest rate increases by 2% and the value of her house

increases by 3% per annum, Kimberly will have $158,774 at age 84. This

may not be enough to pay for the aged care option of her choice.

185 Rarely lenders did enquire about exit strategy as in the following case study.

REPORT 586: Review of reverse mortgage lending in Australia

Case study 18: Erosion less likely with a short-term loan

Margaret and Ted (aged 66 and 68) took a line of credit for $200,000 over

their property valued at $1,000,000.

Their lender recorded that they intended to sell another property and pay

off the reverse mortgage.

They paid down the loan balance to zero with a substantial voluntary

repayment after 18 months. While they paid interest and fees, they held

onto their home.

Margaret and Ted would have faced different prospects if they had stayed

in the loan indefinitely without making voluntary repayments. If the interest

rate on their loan and their property value had remained unchanged, they

would have ended up with only $377,130 by age 84.

REPORT 586: Review of reverse mortgage lending in Australia

E Finding 4: Market concentration and competition

Key points

The reverse mortgage market is highly concentrated with high barriers to

entry for lenders and high switching costs for consumers, all of which are

likely to affect competition and lead to poorer consumer outcomes.

186 Effective competition in the financial system should drive innovation in

product offerings, improvements in product quality and variety, greater

efficiency, and lower prices for the benefit of consumers.

Note: See Productivity Commission, Competition in the Australian financial system—

Draft report (January 2018).

187 Concentration of market share is an indicator commonly used to assess the

level of competition in a market.

Note: In its submission to the Productivity Commission Inquiry into Competition, the

ACCC noted that it assesses the state of competition in a market based on a broad range

of indicators, including: market shares and concentration; the height of barriers to entry

and expansion; the rate of product and service innovation; symmetry in the pass through

of cost reductions and cost increases; the ease with which customers can switch to

substitute products and sources of supply; and the countervailing power of customers.

188

Concentrated markets can still deliver competitive outcomes as long as new

providers can easily enter the market, existing smaller incumbents can

expand, and consumers can easily and conveniently switch between

alternative products or providers.

189 Our data analysis and consultations with stakeholders identified:

(a) high concentration in the reverse mortgage market;

(b) high barriers to entry and growth for lenders; and

reverse mortgage and financial constraints among many borrowers.

190 A market with these characteristics may affect competition and consumer

outcomes, in the form of higher prices, poorer quality products, lower levels

of investment and innovation, and reduced negotiating power for consumers,

regardless of price or features.

Market concentration

191 The reverse mortgage market is highly concentrated, consisting of a small

number of lenders. The largest two lenders accounted for 80% of the dollar

value of new approved loans from 2013–17, while the largest four lenders

accounted for 92% of new approved loans: see Table 10.

REPORT 586: Review of reverse mortgage lending in Australia

Table 10: Lenders in the reverse mortgage market, 2013–17

Lender Percentage of dollar value of

approved loans, 2013–17

Lender A

47%

Lender B (division of Lender A)

21%

Lender C

12%

Lender D

12%

Lender E

192 The Herfindahl-Hirschman Index (HHI) is a statistical measure of market

concentration used widely in competition and market reviews. Several

competition regulators consider that a HHI above 2,000 indicates that a

market is highly concentrated.

Note: See ACCC, Merger guidelines 2008 (updated 2017). In these guidelines, the

ACCC notes they are less likely to identify competition concerns where a post-merger

HHI is less than 2,000 or greater than 2,000 with a delta less than 100. The competition

regulator in the United Kingdom, the Competition and Markets Authority, Merger

Assessment Guidelines indicate a market with a HHI exceeding 2,000 may be regarded

as highly concentrated. This threshold is used by the Financial Conduct Authority, and

is in-line with the threshold used by the European Commission

193 The HHI in the reverse mortgage market in Australia was 3,195 in 2017, and

has remained significantly above the 2,000 level threshold over the past

three years.

194 From late 2017, the concentration in the reverse mortgage market increased

further as two lenders ceased to originate new reverse mortgages. These exiting

lenders together wrote nearly 20% of the amount lent from 2013 to mid-2017.

Figure 18: Market concentration for reverse mortgages

Note: See T

able 34 in Appendix 3 for the underlying data shown in this figure (accessible version).

2,000

4,000

2014 2015 2016 2017

Herfindahl-Hirschman index (HHI)

High concentration threshold, defined by the FCA and CMA

REPORT 586: Review of reverse mortgage lending in Australia

Barriers to entry

195 Our consultations with stakeholders identified factors that may discourage

new or existing lenders from offering reverse mortgages: see Table 11.

Table 11: Potential barriers for lenders in offering reverse mortgages

Factor

Why it may be a barrier

Capital

adequacy

regulations

Industry participants have noted that APRA’s capital adequacy

regulations treated reverse mortgages in the same risk category as

interest-only loans. This required lenders to hold more Tier 1 capital if

they provide reverse mortgages. Industry participants cited this as a

disincentive for lenders which can limit the supply of reverse mortgages.

Note: See the Productivity Commission report, p. 159.

Wholesale

funding

After the global financial crisis, non-bank authorised deposit taking

institutions (ADIs) have faced greater difficulty accessing wholesale

funding. This has led several lenders to exit the reverse mortgage

industry, and may be impeding the entry of new non-ADIs.

Interest

rates/

industry

revenue

Because most reverse mortgages are tied to a variable interest rate,

lenders have experienced declining revenue from reverse mortgages

for the past five years due to lower interest rates.

Switching costs for consumers

196 Our loan file review suggests that many borrowers faced relatively high

financial costs to switch reverse mortgage products due to comparatively

high application fees (see Table 12) as well as costs to receive mandatory

legal advice, get a property valuation, discharge any pre-existing

encumbrances, register the mortgage, and pay stamp duty.

197 Some borrowers who sought to switch products may have also faced

emotional costs associated with refinancing their home.

Table 12: Fees charged by lenders for reverse mortgages

Type of fee

Typical cost

Establishment fee

$500–995

Ongoing administration fee

$0–12

Loan discharge fee

$300–400

Application to increase the credit limit

$395–950

Application to lease, sub-divide or introduce an

easement onto the property

$0–500

REPORT 586: Review of reverse mortgage lending in Australia

F Finding 5: Reducing the risk of financial elder

abuse

Key points

Lenders need to improve their procedures to address the risks of financial

elder abuse. Our loan file review came across 15 instances where lenders

had failed to identify and investigate indicators of possible abuse.

Adequate and robust frameworks across all product-based offerings for

older consumers can help lenders and staff in detecting, combatting and

escalating potential instances of financial elder abuse.

What is elder abuse?

198 The World Health Organisation (WHO) describes elder abuse as ‘a single, or

repeated act, or lack of appropriate action occurring within any relationship

where there is an expectation of trust which causes harm or distress to an

older person’, or as ‘the illegal or improper exploitation or use of funds or

resources of the older person’.

Note: See WHO, The Toronto declaration on the global prevention of elder abuse

(2002) and World report on violence and health (2002).

199 Industry awareness of financial elder abuse is improving. The Australian

Law Reform Commission (ALRC) has highlighted that ‘banks can play a

valuable role in protecting their customers and encouraging them to consider

carefully the risks of certain practices and transactions’.

200 The ALRC recommended that banks could:

(a) train staff to detect and appropriately respond to abuse;

(b) use software and other means to identify suspicious transactions; and

Note: See ALRC Report 131, Elder abuse: A national legal response (June 2017), p. 299.

See also Financial Ombudsman Service (FOS), The FOS approach to financial elder

abuse (October 2017).

201 Adequate and robust frameworks across all product-based offerings for older

consumers can help lenders and staff in detecting, combatting and escalating

potential instances of financial elder abuse. These frameworks not only play

a role in deterring unwanted outcomes but also provide an additional layer of

consumer protection.

202 Such frameworks usually include internal guidelines to assist staff when

responding to ‘red flags’ or warning signs, ongoing training for staff, and

escalation points, specifically referring consumers to external support

agencies where appropriate.

REPORT 586: Review of reverse mortgage lending in Australia

Case study 19: Loan money given to family member

Daisy, an 85 year-old widowed pensioner, applied for a reverse mortgage

of $315,000 in 2010. When she applied for the loan, Daisy was suffering

from Alzheimer’s disease. She also speaks very little English.

At the time of the application, Daisy’s grandson was experiencing financial

hardship.

Daisy went into her local bank branch with her grandson to seek a solution.

Given her grandson’s financial hardship, a personal loan could not be

approved. Instead, Daisy stated that the branch manager persuaded her to

take out a reverse mortgage.

The lender at the time required a legal advice certificate to be witnessed by

a solicitor to ensure Daisy understood the terms of the reverse mortgage.

Her grandson said that he also went to the solicitor’s office with his

grandmother.

Daisy proceeded with the reverse mortgage and provided the money to her

grandson.

The need for adequate safeguards

203 Our review of the policies and procedures of lenders found that:

(a) three lenders lacked policies, procedures or guidelines to help lending

staff to either detect instances of financial elder abuse or to respond to

suspected instances of such abuse;

(b) two lenders did not provide staff with training on financial elder abuse

or capacity while the other lenders touched on this topic through their

responsible lending training to staff; and

vulnerable consumers generally and how to detect and escalate, through

warning signs, suspected fraud or scams.

204 However, lenders did have some indirect safeguards in place to protect

against financial elder abuse. These included:

(a) limiting the ability of a power of attorney to take up a reverse mortgage

for a non-borrower benefit (by confirming the name of the loan account,

or in one case requiring a letter of confirmation signed by a solicitor

that the borrower was to receive benefit of the money); and

(b) only disbursing money into an account in the borrower’s name.

205 Our loan file review came across 15 instances there was sufficient

information in the loan documentation for the lender to identify a possible

instance of financial elder abuse.

REPORT 586: Review of reverse mortgage lending in Australia

206 In each of these cases, the lender either did not make or did not document

further inquiries into whether the consumer was being taken advantage of by

a caregiver or family member.

207 Although our review identified potential indicators of financial elder abuse,

our review of individual loan files identified no evidence of actual financial

elder abuse.

208 Specifically, we found that lenders failed to recognise the following as

potential indicators of financial elder abuse:

(a) repayment on a loan being made by an adult child;

(b) money transferred to a non-borrower;

(d) involvement of children in the application;

(e) only non-borrowers receiving mandatory independent advice; and

(f) file notes indicating abuse by a sibling of the borrower.

209 Our review focused on the steps lenders took to identify and respond to

warning signs of financial elder abuse. We did not examine what, if any,

harm these practices caused to the borrowers in our review.

210 However, these findings illustrate that lenders may not have recognised

potential instances of suspected financial elder abuse, which may have had

repercussions for consumers taking out a reverse mortgage.

Note: See also Case study 4 in the executive summary of this report.

Case study 20: Query about loan purpose

Jennifer, an 82-year old retired widow on an age pension, applied for an

$80,000 reverse mortgage in February 2013. She was approved by the

lender for $60,950. The loan was used to repay an existing line of credit of

approximately $30,000 and an additional $30,000 for alterations to her

property. In determining the purpose of the loan, Jennifer’s daughter was

contacted about the amount borrowed by her mother.

REPORT 586: Review of reverse mortgage lending in Australia

G Finding 6: Protecting other residents in the

home

Key points

A lack of tenancy protection can have serious consequences for non-

borrower residents of the secured property.

The tenancy protection warning does not appear to be operating effectively

to prompt borrowers to consider whether tenancy protection is required.

The tenancy protection provision we reviewed only allowed for limited

protection, and restrictions like age limits meant it was not broadly

applicable. Protection for a non-borrower spouse may be better achieved

by adding them as a co-borrower if possible.

211 A reverse mortgage must be repaid either when the borrower vacates the

property or passes away. If the borrower dies, other people living in the

home may be forced to move out so it can be sold to repay the loan. This can

have serious consequences for a surviving spouse or dependent adult child,

and is a particular risk where one person in a relationship takes care of most

or all of the financial decisions.

212 If the contract does not include tenancy protection, the lender must give the

borrower a tenancy protection warning: see reg 74A and Form 7A of the

National Credit Regulations.

213 The purpose of the tenancy protection warning is:

to enable the consumer to make a fully informed decision about whether a

particular reverse mortgage contract is suitable for their requirements in respect

of the consequences for non-title holding residents (such as a partner whose

name is not on the title of the property). If the borrower wants to protect this

person, they would then be on notice and could choose to find a credit provider

who offers reverse mortgages with the appropriate protections.

Note: See the Explanatory Memorandum, Enhancements Bill, at [3.67].

214 We encourage all lenders to consider including options for broadly

applicable tenancy protection in their contracts. This can help lenders avoid

the risk of providing a loan that is unsuitable for the consumer’s needs and

objectives and help consumers ‘find a credit provider who offers reverse

mortgages with the appropriate protections’.

Limitations of the tenancy protection warning

215 Our consumer research suggested that the tenancy protection warning may

not be operating effectively to ensure that lenders have adequately discussed

this issue with borrowers or that borrowers have adequately considered

whether they may require tenancy protection.

REPORT 586: Review of reverse mortgage lending in Australia

216 It is unclear whether this may be due to the form and timing of the warning,

the bundling of the warning with other documents, a tendency for lenders to

treat the warning as a formality and fail to draw sufficient attention to it, or a

combination of these factors.

217 Our loan file review showed that lenders generally provided the tenancy

protection warning to borrowers when required (87% compliance for lenders

whose contracts do not contain a tenancy protection provision). For the

remaining 13% of files, we could not determine whether the warning was:

(a) not provided at all (either due to non-compliance or because the

contract contained a tenancy protection provision); or

(b) provided but a copy was not placed on file.

Note: One lender does not provide a tenancy protection warning because their contracts

contain a tenancy protection provision.

218 While most loan files had evidence that a tenancy protection warning was

provided, most borrowers we interviewed did not recall a discussion about

tenancy protection. This means that, even though most borrowers would

have received this warning, they could not generally recall pre-contractual

discussions about the implications of the loan for a non-borrower resident.

219 Borrowers did seem to intuitively understand that non-borrower residents

would have to move out of the property if the borrower moved into aged

care or died, but they did not appear to be concerned about this risk. Only

one borrower reported discussing this issue in detail and taking significant

action to ensure the house title was changed to include both partners.

The need for tenancy protection

220 Our loan file review showed that in about 11% of loans, the lender was

aware that there was someone else living in the property: see Figure 19. For

these loans, 42% did not include documented responses about the borrower’s

needs and objectives in this area.

Figure 19: Percentage of loans secured against properties with non-

borrower residents

Note: See Table 35 in Appendix 3 for the underlying data shown in this figure (accessible version).

11%

17%

21%

Lender 1

Lender 2

Lender 3

Lender 4

REPORT 586: Review of reverse mortgage lending in Australia

221 Of the five lenders in our review, only one lender’s contract contained a

tenancy protection provision which allows the borrower to nominate a non-

borrower (subject to approval) for tenancy protection. Under this provision,

the nominated person has a right stay in the property for a further year after

the death of the last borrower. However, the provision gives the lender

discretion to refuse an application seeking tenancy protection and is subject

to limitation (the nominated non-borrower resident must be a relative of the

borrower and over 70 years old). Therefore, this provision would not apply if

the spouse or dependent child was under 70 years of age.

222 For the other four lenders in our review, borrowers could protect non-

borrower residents only by adding their name to the loan contract, making

them a co-borrower. Because reverse mortgages are subject to age

restrictions, this approach has limitations. While it does have the advantage

of giving the person the same rights as a borrower, this may not be desirable

or appropriate depending on the nature of the relationship. One lender has a

policy of actively inquiring about this issue if the borrower has a spouse who

is not listed as a co-borrower.

223 The following case study from our loan file review highlights how non-

borrower residents can be at risk of having to move out after the loan is paid

off. It suggests that if a borrower’s expressed wish to have tenancy protection

is not accommodated, the borrower may still proceed with a loan, possibly

because of a lack of product options, an imbalance in bargaining power, or

because the future need to protect a non-borrower resident is not as important

as the immediate need for the loan money.

Note: See also Case study 5 in the executive summary of this report.

Case study 21: Loan did not provide tenancy protection

Sandra applied for a reverse mortgage to help her buy a property after a

divorce. She asked the lender to add her daughter to the title. The purpose

of this request was not recorded. However, it is likely that she wished to

give her daughter an interest in the property that would allow her to remain

in the property if Sandra died or moved into aged care. The lender could

not accommodate this request as all borrowers had to be over 65.

A tenancy protection warning was given to Sandra. As the lender’s policy

did not allow for tenancy protection, the reverse mortgage that Sandra took

out probably did not meet her express needs and objectives in terms of

providing for her daughter’s security. At the time of our review, the loan was

still active.

REPORT 586: Review of reverse mortgage lending in Australia

H Finding 7: Unfair contract terms

Key points

We identified potentially unfair terms in reverse mortgage contracts

including:

• entire agreement clauses in three lenders’ contracts (one of these

lenders has removed these clauses, the second is considering removing

them and the third no longer provides reverse mortgages);

• broadly drafted unilateral variation clauses; and

• clauses of non-monetary default that potentially allow lenders to take

actions that are disproportionate to the nature of the breach.

Lenders have already made some changes in response to ASIC’s

concerns. Where they have not made changes, or we are not satisfied with

the changes, we will require them to remove or modify unfair terms or, for

existing contracts, to confirm that they will not rely on these terms.

Potentially unfair terms

224 The standard form terms and conditions for reverse mortgages are subject to

laws which prohibit unfair contract terms. Some lenders include terms and

conditions in their loan schedule which do not vary at all between contracts.

These standard terms are also subject to the unfair contract terms law.

225 We reviewed the most recent version of each lender’s standard terms and

conditions provided under a notice to the lenders requesting policies and

procedures and sample files. All five lenders’ contracts contained terms that

have the potential to be unfair. Table 13 summarises these terms and why we

consider them to be potentially unfair.

226 Where a potentially unfair contract term was identified in our review, we

gave each lender an opportunity to make submissions about the term.

227 Specifically, we asked for submissions about:

(a) whether the term would cause a significant imbalance in the parties’

rights and obligations;

(b) why the term was necessary to protect a legitimate business;

on by the lender; and

(d) where relevant, what notice periods were given, whether an opportunity

to rectify a default was provided and what the consumer can do if they

are unhappy with a change made to the contract, including the right to

terminate the contract and any applicable penalty for doing so.

228

Where a contract contains a clause that is potentially unfair, we will

ensure it is removed or modified by the lender.

REPORT 586: Review of reverse mortgage lending in Australia

Page 61

Table 13: Potentially unfair contract terms identified in our review

Type of clause/what it does

Why we are concerned

What we found

Entire agreement clauses

This type of clause absolves

the lender from responsibility

for conduct, statements or

representations that the lender

makes to the borrower outside

of the contract.

Entire agreement clauses or similar terms in reverse mortgage

contracts may be unfair as they could absolve the lender from

responsibility for conduct, statements or representations that

the lender’s staff may have made to the consumer about how

the contract would operate (e.g. how the lender would exercise

their discretions during or on review of the loan).

The ‘big four’ banks have confirmed that their small business

loan contracts now do not contain entire agreement clauses or

similar terms (see Report 565

Unfair contract terms and small

business (REP 565) at paragraphs 29–31).

Three lenders’ contracts contained entire agreement clauses or similar

terms.

One lender has removed this term from its contracts. The second has

agreed to review the term and consider removing it from its contracts. This

lender had never relied on the term.

The third lender is no longer providing reverse mortgages and had never

actually relied on the term.

Broad indemnification

clauses

This type of clause makes the

borrower liable to the lender

for losses, costs, liabilities and

expenses suffered or incurred

by the lender, including those

that may arise outside the

control of the borrower.

Clauses that impose an obligation on a borrower to indemnify

the lender for losses, costs, liabilities and expenses caused by

fraud, negligence or wilful misconduct of the lender (including

its staff, contractors and agents and appointed receivers) are

likely to create an imbalance in rights and obligations of the

parties which would cause detriment to the borrower and are

not reasonably necessary to protect the legitimate interests of

the lender.

One lender’s contract contained a broad indemnification clause which

made the borrower liable for any negligence of a receiver. This lender has

agreed to remove this term from its contract and has never relied on the

term.

Unilateral variation clauses

This type of clause gives

lenders (but not borrowers) a

broad discretion to unilaterally

vary terms and conditions of

the contract, without the

consent of the borrower.

Unilateral variation clauses are not necessarily unfair but are

more likely to be so if they are broadly drafted. This is because

broadly drafted clauses are more likely to cause a significant

imbalance in the rights of the lender and borrower (in favour of

the lender) and may not be reasonably necessary to protect

the legitimate interests of the lender due to the breadth of the

circumstances in which they can be relied on.

All lenders’ standard form contractual terms and conditions contained some

unilateral variation clauses that had the potential to be unfair contract

terms. Some of these concerns were addressed by lenders’ submissions.

Three lenders’ contracts contained broad variation clauses allowing them

an unfettered discretion to vary any term or condition of the contract without

borrower consent.

REPORT 586: Review of reverse mortgage lending in Australia

Page 62

Type of clause/what it does

Why we are concerned

What we found

Unilateral variation clauses

(cont.)

Notice periods/Right to terminate the contract

Case law on unfair contract terms in consumer contracts

suggests that the imbalance created by a unilateral variation

clause can also be counterbalanced if the borrower has

sufficient advance notice of the variation before it comes into

effect to give them a real and reasonable opportunity to exit

the contract without penalty rather than accept the variation.

This reduces the likelihood of significant imbalance in rights

and obligations and of detriment.

Notice periods/Right to terminate the contract

All three lenders’ contracts provided a period of 20–30 days’ notice to be

given in the event of changes under these clauses.

The borrower can terminate the contract by paying the outstanding balance

at any time without unreasonable fees being charged. However, practical

difficulties for borrowers in terminating a reverse mortgage contract mean

that they may be more likely to put up with the changes to the contract.

For example, to pay the outstanding loan balance, most borrowers would

need to either sell their home or refinance their loan. Because borrowers

generally took out the reverse mortgage to stay in their home, they may be

reluctant to sell and downsize or move to aged care.

In addition, because the reverse mortgage market is highly concentrated,

options to refinance are likely to be limited, particularly after some equity

erosion has occurred. Some elderly borrowers may also be dealing with

physical or mental decline, which may inhibit their ability to refinance.

We will require lenders to remove or modify any unreasonably broad

unilateral variation clauses.

Non-monetary default

clauses

This type of clause gives

lenders a broad discretion

about whether to treat a

particular event or

circumstance as an actual

default.

Even if lenders do not rely on non-monetary default clauses to

terminate a loan or impose a penalty, inclusion of these

clauses means they can be used by lenders in an unfair way.

For example, reverse mortgage contracts generally contain

clauses that require the borrower to maintain the security

property to a particular standard, limiting material changes to the

property without consent. This protects the lender’s legitimate

interest in ensuring the value of the security property does not

decline and is particularly important in light of the NNEG.

However, these clauses should not be so broadly drafted that a

lender could call an event of default for a relatively minor change

to a security property. For example, a default clause that does not

allow the borrower to make any changes to the property without

consent would be clearly unfair (as was included by one lender).

All lenders’ contracts contained examples of these clauses. Lenders

submitted that in practice they do not rely on default provisions very often

(or at all), or that in the event of default they will generally work with

borrowers to remedy the default before acting. We consider that where the

provisions do not reflect the lender’s business practices in acting on

defaults, they should be updated to reflect this for clarity.

Borrower misrepresentation

Four of the five lenders’ contracts contained a clause of default relating to

borrower misrepresentation, which had the potential to operate in an unfair

manner. Although there is a legitimate business interest in a lender having

protection from serious untrue or misleading representation and fraudulent

statements, these clauses are generally worded broadly enough that they would

also capture inadvertent minor untrue statements that would not materially alter

the lender’s credit risk. One lender has modified its clause to encompass only

breaches that are material to its decision to provide or continue to provide credit.

REPORT 586: Review of reverse mortgage lending in Australia

Page 63

Type of clause/what it does

Why we are concerned

What we found

Non-monetary default clauses

(cont.)

Broad catch-all default clauses

Three lenders’ contracts contained broad default clauses for any breach of

the contract, which encompassed a range of breaches with varying degrees

of severity that did not always pose a material risk to the lender.

We consider that lenders could:

 provide a reasonable period for a borrower to remediate a breach of a

specific event; and

 adopt a ‘material credit risk’ threshold by applying a ‘material credit risk’

test so that a breach of a specific event must create a material risk to the

lender of a monetary default or of the lender being unable to enforce its

rights against any secured property.

Note: This could be done by incorporating a credit risk-related materiality

element into the definitions of the specific events, or applying a stand-alone

material credit risk test. One lender will limit misrepresentations to those that

materially impact its decision to provide credit.

We will require lenders to remove or modify any unreasonably broad non-

monetary default clauses.

REPORT 586: Review of reverse mortgage lending in Australia

Page 64

I Other issues

Key points

Most borrowers had a basic but sometimes limited understanding of

compound interest, how the size of their loan had been determined, and

the cost of their loan.

Our review indicated that:

• while lenders placed the onus on borrowers to consider how their loan

would affect their Centrelink payments, both lenders and borrowers paid

little if any attention to this issue; and

• lenders had varied policies for supervising inquiries made by brokers,

but there were failures to adequately inquire about the possible future

needs of borrowers for both broker-originated and direct loans.

Borrowers also face significant barriers in finding and receiving

independent professional guidance about a potential reverse mortgage.

Borrower understanding of the product

229 Most of the borrowers in our consumer research had a basic but sometimes

limited understanding of how their reverse mortgage worked.

230 To evaluate the extent to which borrowers understood their loan, in the

consumer interviews we asked borrowers to explain, unprompted and in their

own words, their understanding of a reverse mortgage. We then asked

follow-up questions to further examine the nature of their understanding.

231 In general, while all borrowers could articulate the basic elements of their

loan, most could not explain specific details about these elements, including

the impact of compound interest and loan size on the overall cost of the loan.

Table 14: Quality of borrower understanding

Aspect of loan

Quality of borrower understanding

Compound

interest

All the borrowers we interviewed generally understood

compound interest to mean ‘interest upon interest’, but when

closely questioned many were uncertain about how compound

interest is calculated. Despite this, most borrowers

communicated a belief that compound interest carries risks.

Loan size Most borrowers said that they had felt comfortable applying for

whatever loan amount their lender or broker suggested. Most

believed that this suggested amount was derived from a

calculation of their age and property value, which was some

kind of risk indicator for the lender, but said that they had not put

much thought into how this was calculated.

One borrower stated: ‘The lender said they’d give us a percentage

of the value of our home and we said we’d take the lot!’

REPORT 586: Review of reverse mortgage lending in Australia

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Aspect of loan

Quality of borrower understanding

Loan cost All borrowers told us that they believed that the interest rates for

reverse mortgages were generally more expensive than

comparable credit products and presumed this was because

repayments were not required.

Borrowers also communicated that their loan balance would

increase over time, but many had a limited understanding of how

this loan balance was related to their equity in the secured

property.

232 The following case study illustrates how a misunderstanding of compound

interest affected a particular borrower who made a complaint to their lender.

Case study 22: Misunderstanding of compound interest

James was 64 when he took out a reverse mortgage. He periodically

withdrew money through the loan to pay for utility bills, groceries and other

day-to-day expenses.

James incorrectly believed that he would be charged interest only on the

amounts he withdrew. He did not know that interest also accrues on the

interest itself.

After several years, James learned that monthly interest charges on his

interest had been added to his loan balance. If he had known this sooner,

James would have regularly deposited part of his pension into the loan

account to offset the compounding of the interest.

233 Table 15 outlines the steps that lenders took to ensure that potential

borrowers understood the terms and conditions of a reverse mortgage.

Table 15: What lenders did to ensure borrower understanding

What lenders did

How they did it

Explaining the product to

the borrower

Of the five lenders in our review:

 two lenders required their representatives to complete product-specific training

for reverse mortgages, which included instructions on how the loan should be

explained to consumers;

 four lenders provided either product-specific training or instructions to brokers

explaining how brokers should communicate with potential borrowers about the

product; and

 all lenders typically had some mandatory scripted questions which consumers

had to be asked.

Requiring the borrower to

receive independent

‘financial advice’

Two lenders in our review required potential borrowers to produce a statutory

declaration that they had received independent financial guidance before they

applied for a loan. Declarations were to be signed by the guidance provider. The

three other lenders only recommended that the borrower obtain this guidance.

Note: For details of the financial guidance borrowers received, see paragraphs 268–

273.

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What lenders did

How they did it

Requiring the borrower to

receive independent legal

advice

All five lenders in our review required potential borrowers to receive independent

legal advice before they applied for a loan.

Note: For details of the legal advice borrowers received, see Section C.

Requiring the borrower to

sign a declaration that

they understood the

product

Three of the five lenders required borrowers to sign a declaration. These

declarations ranged from a simple ‘tick-box’ checklist stating that the borrower had

considered their aged care needs to an exhaustive self-administered questionnaire

about the borrower’s financial situation, alternative options and loan objectives.

Recommending that the

borrower consult family

members

Four of the five lenders recommended borrowers to consult a family member

before taking out a reverse mortgage.

Note: For details of recommendations to consult family members, see paragraphs

268–273.

Identifying borrowers who

lacked capacity to enter

into the transaction

Only one lender had a procedure on what steps lenders should take if they

believed that the borrower may have lacked capacity to enter into the transaction.

Conducting a follow-up

compliance call for broker

originated loans

Two lenders conducted follow-up compliance calls. These calls checked whether

the broker had explained the terms of the loan and had given disclosure

documents to the potential borrower, and whether the borrower had considered

the impact of the loan on their Centrelink payments.

234 The borrowers we interviewed stated that these measures had been rigorous,

and sometimes exhausting. Most borrowers indicated that the measures had

helped them feel confident about their decision.

‘I believe they were trying to ensure that I fully understood—I believe I do

fully understand.’

‘They really did go on and on—between the paperwork they provided, the

conversations we had, the solicitor being involved… it was endless!’

235 These measures placed an onus on borrowers to actively take their own steps

to ensure their understanding of the product. When borrowers had already

formed an opinion before speaking with the broker or lender that a reverse

mortgage would be their ‘only option’, placing such an onus on the borrower

is more likely to be ineffective.

‘Maybe I should have read it [the loan documents], and maybe I should have

shopped around a bit more. But I was just happy to have found an option.’

236 Despite these measures, the borrowers we interviewed often did not specifically

recall having any discussion with their lender or broker about aged care or future

long-term needs in relation to the loan, and little to no understanding of the

impact of the loan on their Centrelink payments.

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Implications for income and financial capacity

Centrelink

237 Borrowers can access the money from a reverse mortgage in different ways.

While some lenders only offer a line of credit, many lenders offer several

options for borrowers, including an upfront lump sum.

Note: For a description of different types of loan structure, see Section B.

238

The advantages and disadvantages of each type of payment structure should

be considered as part of the lender’s assessment of the borrower’s needs and

objectives. For example, an upfront lump sum payment can disadvantage

some consumers because:

(a) it may have an impact on their Centrelink payments based on the

income and assets tests (see paragraphs 77–78); and

(b) interest will start to accrue and compound on the loan amount from

when the lump sum is accessed, contributing to equity erosion (see

paragraphs 79–80).

239 Considering the impact of a reverse mortgage on Centrelink payments is not a

prescribed responsible lending requirement. However, lenders should take into

account this issue, and the suitability of the loan payment structure more broadly,

when considering whether a loan suits the borrower’s needs and objectives.

240 Example 1 in RG 209 states that:

because of the potential impact of a reverse mortgage on a consumer’s

eligibility for Centrelink payments, we consider that an inquiry into a

consumer’s eligibility to receive these payments is an essential component

of this investigation and verification.

Potential reduction in Centrelink payments

241 As discussed in Section B, a reverse mortgage may affect a borrower’s age

pension or other Centrelink payments, particularly if it is taken out as a lump

sum of over $40,000, is not used immediately, or is intended as a gift.

242 Our loan file review showed that well over half of borrowers (60%), were

receiving Centrelink payments of some kind. However, the number of

borrowers may be higher as 48% of all files did not record income inquiries.

Therefore, a decrease in Centrelink payments was a possible adverse

outcome for a large number of borrowers.

243 Our data analysis indicated that 2,209 loans were taken out as a lump sum

payment where the approved amount was over $40,000. In our loan file review,

28% of loans had an upfront lump sum payment of $40,000 or greater.

Note: The number of borrowers affected could be higher than 28% as we did not take

into account loans with a mixture of payment types (i.e. lump sum and a line of credit,

redraw or income stream).

REPORT 586: Review of reverse mortgage lending in Australia

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244 We could not access data on what borrowers actually used the loan for and

whether they used the money within 90 days. For this reason, we could not

determine the number of loans that may have caused a reduction in

entitlements due to the income and assets tests and gifting provisions.

Lack of understanding by borrowers

245 Our consumer research highlighted that the impact of taking a lump sum on

Centrelink entitlements was not explicitly considered by consumers. All

except one of the borrowers we interviewed said they had not considered

whether their loan could affect their pension or other Centrelink payments.

‘I’m not sure how negative money can impact your pension? It’s a debt—

how can it affect your pension and why would I even think to tell

Centrelink?’

‘They [Centrelink] only want people who do the wrong thing.’

246 Our consumer research showed that borrowers had a consistent lack of

understanding of the possible impact of a reverse mortgage on entitlements.

All borrowers we interviewed were either retired or about to retire and relied

on a pension or other government benefits to cover day-to-day living

expenses.

247 Almost all borrowers suggested that they had never discussed this with their

financial adviser or lender. Further, many claimed that they ‘knew’ the

reverse mortgage did not affect their pension, but they had not checked it

directly with Centrelink themselves. Those that had considered the impact

tended to have researched the issue themselves and/or asked Centrelink.

248 ASIC encourages borrowers who are considering a reverse mortgage to

contact the Financial Information Service (a free service provided through

Centrelink/Department of Human Services) for information and guidance on

how their entitlements may be affected by a potential loan.

Limited consideration by lenders

249 Our loan file review showed that lenders did not document any consideration

of what type of loan payment would be best for the borrower, including the

impact of taking a lump sum on the borrower’s Centrelink payments.

250 While 80% of files reviewed contained an acknowledgement (either by the

lender or consumer) that the impact on the pension or other entitlements had

been considered by the borrower, there was no evidence that this was

anything more than a mere formality. These acknowledgements were not

supported by any evidence to show that the lender or consumer had actually

considered this impact, or had done so in any detail.

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251 The form of these acknowledgements placed the onus wholly on the

consumer to make inquiries on this topic. Our consumer research indicated

that, in many instances, these inquiries are not occurring.

Example: Impact of a loan on the age pension (hypothetical)

Beatrice, an age pensioner, has few assets besides her home. She takes

out a reverse mortgage of $200,000 for renovations. Her renovations are

delayed and the $200,000 sits in a bank account for 12 months. Because of

this money, her regular age pension payments may be reduced.

Broker-initiated loans

252 Lenders had varying policies for monitoring and supervising the responsible

lending inquiries made by brokers and compliance with the National Credit

Act more broadly.

253 All lenders had policies on making a final assessment for broker-originated

loans. These assessments generally seemed to involve checking through the

application to ensure that the broker had complied with all their obligations

under the National Credit Act and provided all mandatory disclosures.

254 Where lenders had both broker-originated and direct loans, they seemed to

use the same process to assess and verify loan applications, generally by

sending the application to a specialist or more senior person for approval.

255 Lenders appeared to rely primarily on inquiries made by the broker, often

referring applications back to the broker if there was information missing

from the application rather than making their own separate inquiries.

256 For example, one lender relied heavily on a checklist provided by the broker

that had boxes for the broker to tick off to certify that the relevant inquiries

and verification had been made. There was very little evidence on the

lender’s file to support the statements made by the broker in the checklist in

relation to the responsible lending inquiries. Often this lender did not retain

copies of supporting documentation or disclosure documents on the loan file.

257 The use of checklists, with little detail recorded of the underlying

discussions or consideration, is not unique to broker-originated reverse

mortgages. This issue was also observed in our loan file review of loans

originated through direct sales.

258 Two of the three lenders with a higher percentage of broker-originated loans

had policies requiring them to make an assessment or compliance telephone

call to the consumer after the application was lodged. One stated that the

purpose of this was to gauge consumer understanding of the loan application

and loan features, to check whether the Centrelink impact was considered,

and to ensure that key disclosures had been made.

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259 These lenders made follow-up telephone calls in all cases for broker-

originated loans in the files reviewed. For one lender, in most cases, the loan

files only noted that these calls had been made and did not include enough

detail to assess the nature of the discussions. For the other lender, the file

contained a compliance call checklist for the person making the call,

including aged care and other future costs, Centrelink impact, understanding

of loan structure and features, key disclosure documents and loan terms and

conditions such as maintenance and insurance.

260 To some extent, lenders can rely on the inquiries made by brokers. However,

if they do so, we expect them to:

(a) have appropriate processes and procedures in place to review their

representatives’ compliance with the credit legislation, including the

responsible lending obligations;

(b) ensure that representatives are appropriately trained and qualified;

consumers with a copy of the assessment, if requested to do so; and

(d) keep a record of all material that forms the basis of an assessment of

whether a credit contract will be unsuitable.

Note: See Report 330 Review of licensed credit assistance providers’ monitoring and

supervision of credit representatives (REP 330).

Assessment of financial capacity

261 Four of the five lenders did not make any inquiries, or made very limited

inquiries, about the consumer’s financial situation and did not assess whether

the consumer could meet their obligations under the contract without

substantial hardship.

262 While reverse mortgages do not require ongoing repayments, the contract

contains ongoing financial obligations. A typical reverse mortgage contains

obligations to ensure that the property remains insured, to pay rates and to

maintain the property. Most lenders made minimal or no inquiries about

income and expenditure to assess the consumer’s ability to meet these

ongoing contractual financial obligations.

Note 1: In the United Kingdom, the Financial Conduct Authority (FCA) does not

require the financial circumstances of consumers to be considered when applying for an

equity release product.

Note 2: In the United States, since 2015 lenders are required to make a financial

assessment as part of a reverse mortgage application to determine if consumers will be

able to make ongoing payments such say taxes, insurance and other loan obligations. If

the assessment indicates the consumer will not be able to meet these payments, the

lender must require that a portion of the reverse mortgage funds be set aside for these

payments.

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263 Borrowers have certain obligations under their reverse mortgage, such as

maintaining the security property and to continuing to pay insurance and rates.

Borrowers may be in default if they fail to comply with these conditions,

triggering a range of consequences. However, lenders generally do not rely on

these clauses. During the period we reviewed, only one forced sale occurred.

This was due to payment not being made within the required timeframe after

the borrower’s death.

264 Four of the lenders we reviewed did not have a requirement in their policies

and procedures about making inquiries into a consumers’ income. Two lenders

required some inquiries into consumers’ expenses and one required estimating

the expenses associated with maintaining the property (e.g. rates, insurance

and maintenance costs).

265 Just over half of the files we reviewed recorded responses about the

consumer’s income (including Centrelink) and 72 (65%) recorded responses

about expenses.

266 Where lenders’ policies did not require information about a consumer’s

financial circumstances to be collected, this information was generally not

collected or verified in practice. Only one of the lenders consistently made

inquiries and verified this information.

267 Overall, our review found no direct evidence of consumer harm arising from

the absence of inquiries into the financial capacity of potential borrowers.

Finding help

268 Independent professional advice has the potential to aid borrower

understanding. We spoke with lenders, brokers, consumer groups, financial

advisers, accountants, legal practitioners, financial counsellors, and industry

bodies that represent these advisers.

269 Overwhelmingly, these consultations indicated that there are significant

barriers that prevent or deter borrowers from finding and receiving

independent professional guidance about a potential reverse mortgage:

(a) Cost—In REP 224, we found that the estimated cost of providing

comprehensive financial advice to a client was around $2,500–3,500.

Because most potential borrowers are experiencing some degree of

financial difficulty when they are considering a reverse mortgage, these

types of costs may be perceived as too high.

(b) Regulatory liability—Financial advisers and accountants were reluctant

to give guidance about reverse mortgages because they were anxious

that recommending a reverse mortgage could amount to providing

unlicensed credit assistance. To mitigate this risk, some industry bodies

REPORT 586: Review of reverse mortgage lending in Australia

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have advised their members to give only general information about

reverse mortgages. In one instance, a lender offered reverse mortgages

but also prohibited their financial advice arm from giving personalised

guidance about reverse mortgages.

unwilling to provide guidance about a reverse mortgage because the

product had a historically negative reputation as an exploitative product,

or because the adviser was unfamiliar with the product.

270 Every lender we reviewed required prospective borrowers to receive legal

advice and sometimes financial guidance about their potential reverse

mortgage before entering the loan. But the difficulty of finding an adviser to

provide financial guidance meant that some borrowers had to satisfy this

requirement by ‘shopping around’ for someone who was willing to provide

this guidance. Some borrowers resorted to an internet search engine to find a

willing adviser.

271 These difficulties also meant that few borrowers had an opportunity to

receive comprehensive guidance from a financial adviser about their overall

financial needs and retirement position.

272 Rather, our review of financial guidance declarations made by borrowers

indicated that most borrowers visited an accountant or solicitor to give them

financial guidance, rather than a financial adviser: see Figure 20.

Figure 20: Entities that borrowers used to satisfy the financial guidance

requirement for a reverse mortgage

Note: See Table 36 in Appendix 3 for the underlying data shown in this figure (accessible version).

273 Borrowers can receive free and independent general information about

reverse mortgages by contacting the Financial Information Service or by

accessing the ‘My Aged Care’ website, both of which are operated by the

Australian Government. Seniors organisations such as National Seniors

Australia also provide guidance to their members.

Not disclosed

Solicitor

Financial adviser

Accountant

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Appendix 1: Methodology

Scope of our review

274 Our review looked at reverse mortgage lending by the four most active credit

providers that were originating loans for reverse mortgages as of January

2017. This included the Commonwealth Bank of Australia, Westpac

Banking Corporation, Macquarie Bank Limited, and Australian Seniors

Finance Pty Ltd (trading as Heartland Seniors Finance).

275 Our analysis of market concentration was based on loan originations by

corporate groups and did not distinguish between loans offered by separate

brands or divisions within the same corporate group.

276 For all other aspects of this review, we assessed the lending practices of the

Retail Banking Services and Bankwest divisions of the Commonwealth

Bank of Australia as separate lending entities as these divisions had

independent processes for originating reverse mortgages.

277 We assessed the lending practices of three brands within the Westpac

Banking Corporation as a single lending entity as these brands had similar

processes for originating reverse mortgages. The brands were St George

Bank, Bank of Melbourne and BankSA.

278 Our review focused on lending practices in place from 1 January 2013 to

mid-July 2017. We selected January 2013 as a starting point to coincide with

the commencement of the enhanced consumer protections for reverse

mortgages that were introduced through the Credit Enhancements Act.

279 As part of our review, we:

(a) reviewed lending policies and procedures;

(b) examined records for 111 consumer loan files (loan file review);

(d) commissioned independent consumer research involving in-depth

interviews with 30 randomly selected borrowers;

(e) reviewed consumer complaints made to ASIC, the lenders in our

review, and an EDR scheme; and

(f) conducted closed consultations with industry and consumer groups.

280 We would like to thank the lenders who participated in our review and the

other stakeholders we consulted for their help in each stage of this work.

REPORT 586: Review of reverse mortgage lending in Australia

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What the review involved

Review of policies and procedures

281 We examined the policies and procedures that each lender had in force for

providing credit for reverse mortgages. The primary purpose of this work

was to better understand the formal procedures that lenders had in place to

offer reverse mortgages.

Loan file review

282 We randomly selected and individually examined 111 consumer loan files to

better understand the extent to which:

(a) consumers had received independent advice about their loan from a

lawyer, accountant, financial counsellor, or other professional, and how

lenders had documented a record of this advice;

(b) lenders made responsible lending inquiries into the needs and objectives

and financial situation of consumers, and how credit assessments had

been completed; and

residents living in the security property.

283 We selected a total sample size of at least 105 loan files to provide an

appropriate level of statistical confidence for our observations from this

review. The number of loan files we examined from each lender was

proportional to the total number of reverse mortgages they had originated

during the loan file review period of 1 January 2013 to 30 December 2016.

284 Loan files were randomly selected from each lender within the review period

by using a random number generator to identify specific loans based on the

order in which they had been originated.

285 We did not collect or examine loan files from brokers to verify the quality of

inquiries made by brokers for the preliminary assessment.

Quantitative data collection

286 We liaised extensively with lenders to develop an appropriate data collection

framework for this review. Overall, we collected 53 separate data attributes

(e.g. approved credit limit at origination, date the loan was approved) for

each reverse mortgage originated by the lenders in our review between

1 January 2013 and 31 May 2017.

287 Broadly, our data collection framework included:

(a) loan and borrower identification;

(b) information about the security property;

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(d) details about the loan; and

(e) borrower details and demographics.

288 In constructing this framework, we gave each lender an opportunity to give

feedback on a draft set of data definitions and a list of data attributes for

potential collection. We then finalised this framework in consultation with

lenders, taking into account the practical feasibility, forensic value and

anticipated obstacles of collecting each data attribute.

289 This consultation process included a pilot stage, during which we gave each

lender an opportunity within a fixed time period to supply voluntary pilot

data to ASIC (consisting of either real or synthetic data). This process

allowed lenders to verify the capabilities of their data systems and extraction

processes, and to verify that the format of this data would comply with our

expectations. Each lender participated in this pilot process before receiving

the final copy of our data collection framework.

290 Each submission of data that we received from lenders was subjected to a

structured process of profiling and validation. This allowed us to identify

possible errors and issues of interpretation specific to the particular business

practices and data reporting systems of each lender.

291 The steps in this process included the following:

(a) Profiling—We reviewed statistical summaries and distributions for

possible errors and interpretational issues.

(b) Individual variable validation routines—We checked each data point to

ensure it could be interpreted and that it met the data definitions set out

in our final data request.

common coding errors identified in previous data submissions to ensure

that the data from each lender was coded on the same basis

(d) Lender-specific record treatments—We identified and fixed or removed

specific individual attributes or loan records. For example, one lender

had included data for a small number of records for loan applications

that had been commenced but never completed. These corrections were

applied manually to the processed data set.

Quantitative data analysis

292 Our data analysis was based on certain assumptions about:

(a) age, gender and marital status of borrowers;

(b) equity erosion; and

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Age, gender and marital status of borrowers

293 To calculate the age of the borrowers when they took out the loan, we used

the age of the youngest borrower whenever there was more than one

borrower for a loan.

Equity erosion

294 Data from the Australian Institute of Health and Welfare states the average

age of entry to permanent residential aged care is 84 years and rising. We

have used this age as a benchmark reference point for assessing a borrower’s

ability to afford aged care. We then used the actual age of each borrower to

determine how long the loan would continue until they reached 84 years.

Note: See Australian Institute of Health and Welfare, National Aged Care Data

Clearinghouse, Admissions into aged care

295 There are some limitations to this approach:

(a) it excludes loans where the youngest borrower was 84 or older at the

time of extraction (2,162 loans were excluded for this reason);

(b) not all borrowers will retain the reverse mortgage until they move to

aged care, for example, they may downsize to a more affordable

property before moving to aged care; and

vary depending on age at entering the reverse mortgage; and

(d) the upfront payment for aged care will vary and is means tested.

296 Aged care providers advertise maximum upfront accommodation payments.

Prospective residents and aged care providers may agree on a lower amount.

The average agreed upfront accommodation payment from 1 July 2016 to

6 April 2017 was $380,000.

Note: See Aged Care Financing Authority (ACFA), 2017 Annual report on the funding

and financing of the aged care industry (July 2017).

297 We used this amount as a benchmark in our analysis for the upfront cost of

independently paying for aged care. To take into account anticipated increases

in accommodation costs, we inflated $380,000 by 3% per year for each

borrower in the dataset to age 84 years.

298 Calculating the actual cost of aged care for a particular individual can be

complex. If a borrower does not exceed certain income or asset tests, the

Australian Government generally covers accommodation costs up to a

specified amount.

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299 Residents can also choose to pay an accommodation contribution or an

accommodation payment through:

(a) a lump-sum ‘refundable accommodation contribution’ or ‘refundable

accommodation deposit’ (we refer to this as an ‘upfront accommodation

payment’);

(b) rental-style payments called a ‘daily accommodation contribution’ or

‘daily accommodation payment’ (we refer to this as a ‘daily

accommodation payment’); or

300 A borrower who does not want to leave an inheritance may be comfortable

with paying a lower upfront accommodation payment and paying a higher

daily accommodation payment. Accommodation contributions are based on

income and assets tests, so a borrower who receives less from the sale of

their home due to equity erosion from a reverse mortgage may be required to

pay a lower accommodation contribution.

301 In considering how equity erosion may affect borrowers, we also assumed

that borrowers:

(a) did not make voluntary repayments; and

(b) may have withdrawn the full amount of the loan in a lump sum if they

took a line of credit.

302 We made these assumptions because lenders:

(a) have authorised borrowers to do these things (so for these borrowers

there is a possibility of erosion of equity); and

(b) do not ask borrowers how they anticipate drawing down on the loan

beyond simple inquiries about purpose.

303 Of the 17,349 loans for which we obtained data, 152 loans were excluded

from this analysis because missing property valuation data was not supplied,

and 33 loans were excluded because the borrower was older than 84 years of

age when they applied for the loan.

Market concentration

304 The Herfindahl-Hirschman Index (HHI) is calculated by squaring the market

share of each firm competing in the market and then adding the resulting

numbers. For example, for a market consisting of four firms with shares of

30%, 30%, 20%, and 20%, the HHI is 2,600, (302+302+202+202=2,600).

305 The HHI takes into account the number of firms in a market and their

relative size distribution. It approaches zero when a market has a large

number of firms of relatively equal size (more competitive) and reaches its

maximum of 10,000 points when a market is controlled by a single firm

(monopoly).

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306 The HHI increases both as the number of firms in the market decreases and

as the disparity in size between those firms increases. The benefit of the HHI

over other concentration measures is that it gives proportionately greater

weight to the market shares of the larger firms, in accord with their relative

importance in competitive interactions.

307 When assessing the HHI, we used the benchmarks from the Competition and

Markets Authority (CMA) and the Financial Conduct Authority (FCA) in the

United Kingdom—that is, if the HHI is:

(a) greater than 2,000, the market is considered highly concentrated;

(b) between 1,000 and 2,000, the market is considered moderately

concentrated; or

308 We used a number of models to determine the HHI for the reverse mortgage

market in Australia, including adjusting the result for our data having only

captured close to 90% of the market and treating lenders who are divisions

of other lender in the market separately or as one entity.

Consumer research

309 We commissioned Essence Communications to carry out qualitative research

with consumers who had a reverse mortgage.

310 Essence Communications spoke with 30 borrowers, of whom 15 had taken

out a reverse mortgage from 1 April 2017 to 30 June 2017 (recent

borrowers) and 15 who had taken out the reverse mortgage between 1 July

2013 and 30 June 2015 (established borrowers). Interviews were conducted

in metropolitan and regional locations around Australia.

311 To source participants for this research, we obtained contact lists from each

of the lenders in our review using our compulsory information gathering

powers. We wrote to these borrowers, inviting them to participate in this

research. Borrowers who were interested then contacted us and gave

permission for Essence Communications to contact them and carry out the

research.

312 Because we received more interest in this study than the number of places

that were available, we set quotas for the number of borrowers that would be

interviewed from each lender, by State/Territory, by geographical area type

(urban, rural) and by the amount borrowed, to collect a representative

sample. The quota on the number of borrowers we interviewed from each

lender was roughly consistent with the number of reverse mortgages that

each lender had originated during the review period.

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Table 16: Consumer research sample frame

Lender Recent

borrowers

Established

borrowers

Total

borrowers

interviewed

Lender A

Lender B

Lender C

Lender D

Lender E

Total interviews

313 Essence Communications randomly selected the consumers who would

participate in this research from each quota.

314 The research itself involved one-to-one qualitative interviews with

consumers who had taken out the reverse mortgage. Interviews lasted

approximately one hour and were conducted in the consumer’s home or over

the phone between 24 October and 14 November 2017.

315 The interviews explored:

(a) why consumers take out reverse mortgages;

(b) where and how they obtain information and advice during the purchase;

(d) the processes they go through to purchase; and

(e) how having a reverse mortgage has impacted their life-style and

financial well-being.

316 There are limitations to this research. Our research was qualitative in nature.

This provides in-depth understanding about the motivations, behaviour and

knowledge of consumers. Due to the small sample sizes, qualitative research

cannot be generalised to the wider population; it is used for illustrative

purposes only.

317 As the consumers who participated in the research self-selected, there is a

risk that we only spoke to those who were very engaged with their reverse

mortgage product. They may be more knowledgeable about the product than

reverse mortgage customers in general.

318 All interviews were carried out with consumers after the fact. This means

there may be some post-rationalisation biases in the interviews as consumers

justify their actions or they may have simply forgotten all the details of the

process of taking out the reverse mortgage.

REPORT 586: Review of reverse mortgage lending in Australia

Page 80

Stakeholder consultations

319 We had closed consultations with over 30 external stakeholders, including

but not limited to:

(a) government departments and agencies;

(b) industry bodies which represent credit and financial services providers;

counsellors;

(d) consumer advocacy groups and legal centres;

(e) credit providers outside the scope of our review;

(f) academics;

(g) brokers; and

(h) international regulators.

320 Stakeholders consulted with us over phone or through written submissions.

From this process, we sought to better understand perspectives about:

(a) the benefits, disadvantages, and risks of a reverse mortgage;

(b) factors affecting the market for reverse mortgages;

including their understanding of a reverse mortgage and how they

received information about a potential loan; and

(d) the regulatory framework for reverse mortgages, including the

responsible lending obligations.

REPORT 586: Review of reverse mortgage lending in Australia

Page 81

Appendix 2: Regulation in other jurisdictions

Table 17: Overview of reverse mortgage lending in other jurisdictions

Country

Regulatory framework

Current market

Regulatory requirements

United

States

Home equity conversion mortgages are provided by

non-government lenders, but are insured by the

Federal Housing Administration (FHA), part of the

US Department of Housing and Urban

Development. Nearly all reverse mortgages are

home equity conversion mortgages.

The Consumer Financial Protection Bureau (CFPB)

provides oversight of the provision of reverse

mortgages. State regulators also provide oversight.

Note: See CFPB, Reverse mortgages: Report to

Congress, 28 June 2012; Kimkiewicz, Melissa, ‘

State

regulators have their eye on reverse mortgages‘

National Mortgage News, 26 July 2017.

Applications peaked in 2009 with

around 115,000 approvals for these

products, and has since stabilised to

around 50,000 approvals.

Home equity conversion mortgages are

the only reverse mortgage insured by

the FHA.

As at 2017, the maximum loan limit is

set at $636,150.

Reverse mortgages insured by the FHA have certain

requirements, including:

 borrowers must be 62 or older;

 borrowers or their estates are not liable for loan balances

that exceed the value of their home and lenders are

guaranteed they will be repaid in full;

 borrowers are guaranteed access to the full amount

authorised, even if the lender experiences financial

difficulty (where the borrower does not take the full amount

at settlement); and

 independent financial counselling is required for all

borrowers; and

 cross-selling of other financial products is prohibited.

United

Kingdom

Reverse mortgages (known as lifetime mortgages)

are regulated by the FCA.

Home reversion products are also regulated under

the same framework. Loans are provided by non-

government lenders, frequently insurance

companies.

Note: See FCA, Mortgages and home finance:

Conduct of business sourcebook (PDF, 1.5 MB),

Consultation Paper 16/21, September 2016, (PDF 1

MB).

Applications peaked in 2008. In 2016,

£2.15 billion of loans were written.

As of August 2017, there were 78

different product options available from

members of the Equity Release

Council, compared to 24 product

options a decade ago.

The maximum LVR available in the

market is 50%.

Note: See Institute fur

Finanzdienstleistungen e.V.,

Study on

equity release schemes in the EU, Pt 1,

2007.

The FCA recently clarified the requirements for responsible

lending inquiries for reverse mortgages to make it easier for

providers to offer a type of lifetime mortgage that allows

consumers to choose when to stop making interest

payments. Affordability assessments are no longer required

for these mortgages (bringing them into line with other types

of reverse mortgages).

Lenders must give consumers key facts illustrations.

Voluntary repayments are not always possible and there may

be charges.

REPORT 586: Review of reverse mortgage lending in Australia

Page 82

Country

Regulatory framework

Current market

Regulatory requirements

New

Zealand

In 2008 the Ministry of Social Development

developed a code of standards for reverse

mortgages. The code is voluntary and not legally

binding.

There are general protections under the Consumer

Guarantees Act. Most lenders also comply with the

NZ Government’s Responsible Lending Code,

although it is not legally binding.

Note: See Deloitte report re NZ reverse mortgages and

NZ Government’s reverse mortgages website

The total value of the NZ market is

similar to the pre-global financial crisis

period. However, the number of

mortgages has been decreasing while

the average loan size has increased.

In December 2008 there were 6,878

reverse mortgages with an average

loan size of $62,516 compared to 5,338

reverse mortgages with an average

loan size of $83,229 in December 2013.

There are two lenders in the market.

The voluntary Code of Standards provides for:

 lifetime occupancy;

 a no negative equity guarantee;

 clear explanations of the conditions, charges, costs and

responsibilities;

 independent legal advice before taking out the loan; and

 access to an independent complaints process.

Japan There is a mix of government-backed and non-

government-backed reverse mortgages. The

Ministry of Health, Labour, and Welfare introduced a

national government reverse mortgage program in

2002. Private banks also offer reverse mortgages

(which account for nearly half of current loans).

Note: See Kobayashi, Masahiro et al ‘ The reverse

mortgage market in Japan and Its challenges’,

Cityscape: A Journal of Policy Development and

Research,19 (2017) 1, 99, and Kojima,Toshiro, ‘

How

to make reverse mortgages more common in Japan‘

Nomura Journal of Capital Markets 4 (Spring 2013) 4.

Reverse mortgages are not very

popular in Japan; they generally require

interest payments to be made during

the course of the loan and do not

guarantee lifetime tenure and therefore

would not be called reverse mortgages

in Australia.

Some of the loans from private banks are non-recourse in

terms of the personal assets of borrowers, while others

require heirs to be responsible for the remaining balance. In

some cases, to protect borrowers and their heirs, special

counselling is conducted before the conclusion of the

contract. Alternatively, many lenders require prior consent by

the reasonably presumed heirs to dispose of the property to

avoid conflict at inheritance.

South

Korea

The Korea Housing Finance Corporation (KHFC)

Law was amended in 2007 to allow KHFC to

guarantee reverse mortgage products provided by

private financial institutions. KHFC is owned by the

government and central bank of South Korea.

More than 20,000 people have applied

for KHFC-sponsored reverse

mortgages.

The main features of the reverse mortgage products