Reverse Mortgage Prisoners: Increasing Interest Rates and Falling Property Prices
Increasing foreign investor charges, banks no longer willing to lend to foreign investors, and investor loans being clipped is creating an environment which is feared by nearly all of those locked into a reverse mortgage, but unfortunately this is the reality currently facing many of those of retirement age in Australia.
Recent decreases in property value may trigger a perfect storm, financially trapping those who have taken out reverse mortgages. This risk is subtly supported by recent lead trending data published by the Domain Property Group, with auction clearance rates on Saturday 10th June 2017 shown as follows for east coast cities:
Sydney - 67%
Brisbane - 60%
Adelaide - 68%
Canberra - 63%
Approximately 50,000 people in Australia have a reverse mortgage against their property. These people have typically borrowed heavily, and have little or no income, making them vulnerable to any increases in interest rates (especially given that reverse mortgages are typically charged at a higher interest rate that most traditional property mortgages), or decreases in property values.
But what's driving these influences?
A recent announcement by the NSW government has confirmed that stamp duty for foreign buyers will double to 8 per cent, and land tax will be increased from 0.75 per cent to 2 per cent from the 1st of July 2017. This influence will no doubt remove further buyers from the marketplace, placing further pressure on the value of real estate.
Further to this, a review of lending practices in 2016 by the four major banks led to lending all but being cut off from foreign investors, which prevented many from being able to attain a footing in the property market. This influence has subsequently led to the number of foreign investors buying in Australia dropping, along with an associated property value drop. This change of policy by the banks was driven primarily by the bank’s unease of documentation supporting foreign loan applications, of which were found to be counterfeit in many cases.
According to the Australian Bureau of Statistics (ABS), home loan approvals decreased for a third consecutive month in April 2017. Data sources confirmed that 53,062 home loans were approved, down from 54,088 in the previous month, a 1.9% decrease. Additionally, the value of housing commitments fell $32.5 billion in April, down 1.6% on March’s performance.
These recent reverse mortgage dangers should make those looking to enter into a reverse mortgage more cautious before doing so to ensure that they don’t get caught in the same financially insecure predicament.