Retirees marooned as banks retreat on reverse mortgages
Retirees are being blocked from accessing the money trapped in their property as banks pull out of the reverse mortgage market, fuelling a growing income inequality among older Australians.
A new report has warned Baby Boomers have been dudded by only having half of their working lives to accrue super, while having most of their wealth tied up in the family home - putting a strain on families and the government to finance a rapidly growing ageing population.
The Household Capital white paper findings - backed by former superannuation minister Nick Sherry, former chair of the Productivity Commission Peter Harris and Per Capita founder Joshua Funder - said while 80 per cent of retired Australians own their own home the economy has failed to adequately fund their retirements.
Despite high levels of median wealth in Australia, retirees experience high levels of relative poverty because they can't access the equity in their homes. Many have only made compulsory superannuation contributions since 1992.
That strain is likely to increase with up to 5.5 million people born between 1946 and 1964 now reaching retirement. Treasury expects the number of people aged between 65 and 84 years to reach 7 million by 2054.
Despite the growth, the reverse mortgage market in Australia has remained static at around 35,000 outstanding loans valued at $3.5 billion for the past decade. The UK doubled that figure in 2017 alone.
The local decline has accelerated in the past 12 months, with the Commonwealth Bank, Westpac and Macquarie all announcing their exit from the Australian reverse mortgage market. The loans had increasingly been seen as method of last resort for homeowners and become a reputational risk for lenders in the wake of mis-selling disputes in the lead up to the banking royal commission.
The situation has left Australia with some of the highest levels of wealth at the same time as the highest levels of relative income inequality in the developed world.
Australia is ranked first on Credit Suisse's global wealth report with median net wealth of up to $200,000 per adult, but also has more than a third of its population aged over 65 in relative income poverty in retirement, the second highest rate in the OECD.
The white paper found Australia's retirement income policy needed to include a fourth pillar beyond superannuation, non-superannuation savings and the age pension - home equity, which would also allow retirees to opt to stay in their own homes longer.
Household Capital have called for the government to increase the threshold that can be transferred to superannuation and excluded from the pensions assets test to be raised to $300,000.
Laws passed in 2012 mean borrowers can obtain up to 25 per cent of their home value at age 65.
The government does run a Pension Loans Scheme that can be used to take out a loan against the value of a home, but it is rarely used, and can only provide a fixed income rather than a lump sum.
Household Capital will launch its own home equity product on Wednesday.
The company’s chief executive, Dr Funder, said the retirement balances of baby boomers faced a double threat: only receiving compulsory superannuation halfway through their careers and gaining 10 years of longevity.
"Now the banks are constraining credit in home equity despite the huge need," he said. "Most people could easily fund their own in-home care if they had access to equity."
Dr Funder dismissed the impact of the proposal on inheritance and said longevity was more of an issue.
"What has disinherited the kids is Baby Boomers living to 95, "he said. "Kids get the money when they are 75 and it's too late."