CBA and subsidiary Bankwest are axing reverse mortgages, the last of the major lenders to pull out of the $3.1 billion sector amid warnings of tougher regulation and rising costs.
The banks will withdraw the product for new borrowers from the beginning of next year. It will continue lending for existing borrowers.
A CBA spokesman said the decision to withdraw "Equity Unlock for Seniors" was part of an ongoing streamlining of its product portfolio intended to simplify lending, remove duplication and lower costs.
Westpac Group, the nation's second largest lender, and Macquarie Bank, withdrew from the market late last year.
A reverse mortgage borrower can take the funds from the equity in their house as a lump sum, regular income stream, cash reserve, or a combination of all three.
The mortgage, interest and all fees do not need to be repaid until the property is sold, which can be from the estate of the last remaining borrower, or if the last remaining borrower leaves the property for more than 12 months.
CBA and Bankwest's decision to quit the sector means only Heartlands Seniors' Finance, IMB Bank and P&N Bank remain significant players, according to analysis by Canstar, which monitors financial products.
The federal government is entering the sector with a low-cost reverse mortgage scheme that will provide an alternative to the private sector.
Demand tipped to rise
Demand for the products is predicted to grow in an ageing community where seniors have billions of dollars in equity in their family home that can be tapped by a reverse mortgage, according to regulators. The borrowers are typically cut off from traditional lending because they do not have sufficient income to service a loan.
The government is also keen to allow older Australians to remain in their homes, which they typically prefer and which eases the strain on medical and aged care infrastructure.
CBA predicts 20 per cent of Australians will be over 65 within 12 years, or an increase of 3.6 million to 5.7 million in about 15 years.
But rising demand is not expected to fully offset increasing capital costs under new Basel III regulations that require additional capital to back the loans, according to industry sources.
Selling of the products, which are typically recommended by financial advisers or mortgage brokers, recently came under fire from regulators concerned about the quality of advice.
About 92 per cent of loan files reviewed by the Australian Securities and Investments Commission failed to record possible needs of the borrower in sufficient detail and contained no evidence the broker, or lender, had discussed how a loan may affect the borrower's ability to afford future needs.
Improved scrutiny and advice and tougher regulations are expected, particularly in the wake of expected improvements to borrowing standards in the wake of the banking royal commission.
For example, the Finance Brokers Association of Australia, which represents finance and mortgage brokers, is in talks with regulators to improve advice standards.