Reversal of fortune: Home equity boom will have a price

Commercial and government-backed reverse mortgages are going to boom in the months ahead – but not everyone can be a winner.

Older Australians are increasingly tapping the value of their homes to release cash. But an ultimate price – in terms of reduced inheritance or worse still, reduced ability to pay medical bills – looms large.

So called “reverse mortgage” activity is booming in both commercial finance products and the government’s upgraded Home Equity Access Scheme.

One of the biggest players in the commercial sector, Household Capital, is now forecasting it can drive a tenfold increase in the value of its portfolio. Household Capital, which is planning a $1bn loan program next year, says its portfolio is growing by 50 per cent a year.

Meanwhile, the government’s once sleepy Pension Loan Scheme has come alive after new rules allowed financial advisers to recommend the product. The number of applicants to the renamed Home Equity Access Scheme rose 40 per cent in the year to June.

Put simply, conditions are ideal for the home equity release sector to soar in 2024 as

elevated inflation hits the cost of living for older Australians, while residential property prices continue to expand.

Residential prices have lifted around 7 per cent nationwide in 2023, with industry analysts expecting a further 3-5 per cent increase in 2024. This continued lift in property prices means asset-rich, income-poor retirees will be attracted to keep tapping the equity in their homes.

How it works

With some important variations, a homeowner can sell a part of their home to a financial institution in exchange for a regular income. At best, the older Australian picks up a new line of income with a predictable reduction in the future value of their home – at worst the products create new unknowns for cash-strapped retirees who may regret the move.

Users of home equity release schemes pay back the financier when the property is sold.

Many retirees can be surprised by how quickly the size of a home-equity loan can grow when the debt is compounding over time. In turn, this can lead to the equivalent of “sticker shock” when they realise they reduction in family wealth at the end of the process.

“It’s not surprising they are becoming more popular, but I would warn they can be expensive, and they may not be suitable for older people who are vulnerable in any way. There have been reports of aggressive property selling,” Donal Griffin of Legacy Law says.

The government’s Home Equity Access Scheme is currently pitched at a rate of 3.95 per cent and around 10,000 savers took up the product over the last year. Commercial products – which do not have some of the restrictions linked with the government scheme – can have rates more than twice as high.

The restriction within the government scheme is that participants can receive at most, 150 per cent of the maximum age pension, which includes supplements.

Typically, users of home equity products “sell” about 25 per cent of their home value – suggesting a standard package is around $250,000 – and under some arrangements users of the schemes can get lump sums as well as regular income.

Home equity product promoters suggest reverse mortgages allow older Australians to meet their needs while boosting the income they receive without having to change their primary residence.

In 2024, the home equity market is set to soar and yet it is operating from what is effectively a standing start – the overall dollar volumes in the sector are still tiny by the standards of the residential property market.

Originally published as Reversal of fortune: Home equity boom will have a price