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Pressure on government to match super-backed reverse mortgage

November 4, 2019

By initiating the review, the government is signalling a small rate reduction for the 1100 pensioners who have reverse mortgages with the scheme.

 

Industry superannuation funds are the underwriters of the most competitive reverse mortgage on the market, which is offered by newcomer Household Capital at an interest rate of 5.15 per cent.

 

The government is reviewing the 5.25 per cent rate of interest charged on reverse mortgages offered through the Pension Loans Scheme. The 5.25 per cent rate is unchanged despite successive cuts to official rates.

 

"Our rates are lower than other providers, and lower than the rate offered by banks before they withdrew from the market, because our wholesale funding is supplied by ME Bank, meaning its ultimately sourced from industry super funds' members," Household Capital chief executive Josh Funder said.

 

Established in 2016, Household Capital is backed by private investors including former Macquarie Group executive Jim Miller.

ME Bank, which is owned by 26 industry super funds, provided an initial $100 million wholesale debt facility and has acquired a minority stake in Household Capital.

 

Retirees had accused the government of hypocrisy for holding the Pension Loan Scheme rate at 5.25 per cent while launching an inquiry into banks for not passing on official rate cuts to mortgage borrowers in full.

 

By initiating the review, the government is signalling a small rate reduction for the 1100 pensioners who have reverse mortgages with the scheme.

 

Treasurer Josh Frydenberg has emphasised that rates charged for commercial products range from about 6.25 per cent to 6.5 per cent.

But mutuals, or customer-owned banks, offer products at lower rates, according to online comparison outfit Finder.

 

G&C Mutual Bank charges 5.47 per cent for its "retirees access" home loan, for example, and WA-based P&N Bank charges 5.65 per cent.

"The lowest rate is 5.15 per cent from Household Capital," Finder insights manager Graham Cooke said.

 

"The average interest rate of listed reverse mortgages is 5.93 per cent and the average comparison rate is 6.01 per cent.

 

"But keep in mind that some reverse mortgage rates are dependent upon other factors such as age, how the money is to be used, and the state where the borrower lives."

 

Given the many billions of dollars locked up in housing in Australia, policy makers have long lamented the limited take-up of reverse mortgages by asset-rich, income-poor pensioners.

 

In last year's federal budget, the government announced it would broaden access to the Pension Loans Scheme to include self-funded retirees as well as age pension recipients.

 

All of the major banks have exited the reverse mortgage market.

Mr Funder said there was little to no default risk for reverse mortgages but banks had traditionally charged excessive amounts.

 

In a 2015 report, the Productivity Commission said that "the true risk premium for reverse mortgages is well below that implied by the interest rates on the market".

 

A spokeswoman for Smooth Retirement, which provides independent advice on equity release schemes, said trying to compare the different products on the market could be difficult.

 

Depending on the lender, there might be establishment, settlement or application fees. Some schemes provided a lump sum only while others made regular payments.

 

The government has not provided any details about the review of the Pension Loan Scheme interest rate.

 

A retirement income review is under way and is due to report to the government next June.

 

Source: https://www.afr.com/property/residential/pressure-on-government-to-match-super-backed-reverse-mortgage-20191101-p536he

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